Environmental Audit Committee
Wednesday 4th November 2026
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14:34
Toby Perkins
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Toby Perkins
Two. Order, order! Well, welcome, everybody, to the latest meeting of the Environmental Audit Committee. As part of our review into the Treasury and the economics of Climate and Nature. I'm pleased to say that we have two excellent panels today. The first panel representing a number of different sectors who are at the forefront of Treasury policies, and the climate and the environment. And so I'm going to invite our panelists to introduce themselves and their organisation, starting with yourself, Mr.
Croucher.
Croucher.
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Speaker 2
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Speaker 2
Thank you chair. Adam Berman I'm director of policy and advocacy at energy UK, which is the industry body for the energy sector. We cover the gamut of the energy sector from all forms of generation, transport network, right through to all the electricity and gas that's sold to every home and business across the country.
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Toby Perkins
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Toby Perkins
Well, you've got us on the edge of our seats there, gentlemen, but I'm afraid we're going to have to suspend this sitting because members will have heard the division bells go on. So we will come back to this very shortly. Order! Order sitting is suspended. Two. Order, order! Well welcome back. We have just heard before the break from our panellists and I now start, if I can, with yourself, Mr. Croucher, from your perspective to the Treasury's tax and fiscal policies, provide your sector, the motor sector, with a coherent set of incentives to invest in the transition to a lower carbon and more environmentally sustainable economy, whilst supporting the growth and competitiveness of the sector.
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Speaker 1
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Speaker 1
I mean, I guess in a word, no, but it's challenging. So. You know, we've had some some positive support from from the Treasury. So we have like drive 35, you know, which is set to provide support for the shift to electric vehicles. So on the manufacturing side, you know, that's really welcome and really helpful. But then when you look at, you know, the cost of doing business in the UK, it's very expensive energy costs in particular, very high. So we welcome things like the British Industrial Competitiveness Scheme coming along. But you know, that just brings our costs down to from exorbitant to very expensive compared to with our international competitors.
And then you've got measures on the vehicle side, you know, the transition to electric vehicles and healthy markets are really critical for the industry to support investment into the UK. And on that side, we've seen quite mixed Side, we've seen quite mixed messages. So, you know, we've had CO2 based taxes for some time, which have been, you know, encouraging people to transition. We had zero rated vehicle excise duty for electric cars up until 2025. And we did have the plug in car grant that was then removed. The market then collapsed. Now we've got the electric car grant back in place, which is really welcome.
About a third of the models in the. market collect that. And we have seen battery electric vehicle demand uptick quite sharply. But a lot of that has really been driven by the. manufacturers as well. So a lot of product a lot of discounts going into the. marketplace to try and shift it from its natural demand levels. And then we've now and in the budget, you know, reconfirmed that you've got EV coming in.
And then you've got measures on the vehicle side, you know, the transition to electric vehicles and healthy markets are really critical for the industry to support investment into the UK. And on that side, we've seen quite mixed Side, we've seen quite mixed messages. So, you know, we've had CO2 based taxes for some time, which have been, you know, encouraging people to transition. We had zero rated vehicle excise duty for electric cars up until 2025. And we did have the plug in car grant that was then removed. The market then collapsed. Now we've got the electric car grant back in place, which is really welcome.
About a third of the models in the. market collect that. And we have seen battery electric vehicle demand uptick quite sharply. But a lot of that has really been driven by the. manufacturers as well. So a lot of product a lot of discounts going into the. marketplace to try and shift it from its natural demand levels. And then we've now and in the budget, you know, reconfirmed that you've got EV coming in.
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Speaker 1
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Speaker 1
And that sends, you know, quite a conflicted message to the customer that they're going to be paying an EV. It landed as an EV tax. You know, when I speak to my friends and family, you know, they all just all asking me, oh, you know, going to buy an EV and now I've got to pay this new tax on it. You know, you have to go through and explain to them all about the difference between fuel duty and EV. And you know, they might be paying lower rates for EV. But you know it just came as the wrong message at the wrong time.
And that's the real challenge for the sector is how do you manage a successful. transition when you've got a lot of other sort of changes going on in the sector? A lot of.
And that's the real challenge for the sector is how do you manage a successful. transition when you've got a lot of other sort of changes going on in the sector? A lot of.
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Speaker 1
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Speaker 1
In the first. instance rather than fully electric vehicles. But everybody is moving towards. electrification and zero emission vehicles in terms of, you know, Ice vehicles. You know, we still have a large business in that as the. manufacturers in the UK. But most of what we produce is actually for export. So, you know, 85, 80% of what we produce is exported. So how those international. markets and their. regulations are quite critical in terms of what we will be producing in the UK. But having a healthy domestic. market and a government that understands the. industry and enables you to be able to, you know, sell what you produce in the UK is still really critical and really critical for investment decisions.
But yeah, you know, that .
But yeah, you know, that .
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Toby Perkins
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Toby Perkins
I mean, the government would say, well, you know, electric vehicles, even after you've had all still be cheaper. The ownership of electric vehicle will still be cheaper than ownership of petrol vehicle. We're also conscious that we get lobbying from your industry and others on not. increasing fuel duty. So, I mean, where, you know, what should government be doing expecting that there's going to be. revenues one way or another? You know, would you like to see them scrap and, you know, try to recoup the money from fuel duty? Would you like them to stick with the freeze in fuel duty and accept that?
I mean, if you if you had to. accept the government's going to take .
I mean, if you if you had to. accept the government's going to take .
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Speaker 1
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Speaker 1
31, I think it's down to 2 billion less. So, you know, fuel duty revenues aren't going anywhere in the short term. And and the Yvette comes in before the revenues begin to fall away. So that's why we would have called for better engagement with industry and stakeholders to try and design something that was more attractive. But really, it's the the timing of it. So it comes in in. 28 when that is when you've got the biggest. uplift in the Zev mandate trajectory. So it goes from. 38% that battery electric vehicles, zero emission vehicle. target in.
2027 to 52% in 2028. So you've got a 14 percentage point jump at the moment. The members say natural demand for battery electric vehicles is around 16%. The current market is.
2027 to 52% in 2028. So you've got a 14 percentage point jump at the moment. The members say natural demand for battery electric vehicles is around 16%. The current market is.
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Toby Perkins
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Toby Perkins
Taxation system. So everybody's on the same system. Thank you, I appreciate that. And let me turn to you, Mr. McDermott. Sort of starting question is the same. We to what extent do the Treasury's tax and fiscal sorry policies provide your sector with a coherent set of incentives? I think, you know, we're very conscious that the ceramic sector is one. Colleagues like Gareth Snell in this place often making the case about the pressures on your sector.
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Speaker 2
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Speaker 2
And growing the UK domestic output. So two sides to to that first one is on the kind of the environmental aims. And the second one is on. Making sure that we maintain our international. competitiveness and can invest for the for the future. So there's a lot of emphasis goes on the former and not enough on the on the latter. So a lot of. policies basically.
drive the environmental aims by adding cost. And that cost then makes us adds to our cost base, makes us less. competitive when we're competing in fiercely competitive.
drive the environmental aims by adding cost. And that cost then makes us adds to our cost base, makes us less. competitive when we're competing in fiercely competitive.
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Speaker 2
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Speaker 2
Fund for for ceramics. When we had the Industrial Energy Transformation Fund again, positive. It's about supporting that that investment case is things on capital allowances which are which are positive. But on the on the other side of the coin, the negatives high. electricity costs the highest in the world. And as a sector, we get very little. support on those high electricity costs on gas. Historically, gas was more competitive. But over the last 20 years we've seen seen us becoming less competitive. Energy. Gas prices are high and volatile, and generally we've been becoming less competitive. High carbon.
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Speaker 2
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Speaker 2
Giftware, you've got clay construction products, bricks, roof tiles. You've also got refractories, which are used in steel and glass and cement making. So each facet of the industry has probably got a different, different key market. So on the on, on the brick side, there's a lot of focus on the domestic market. And there we're competing against imports, which are coming from the EU, but also from further afield as as well there the the trade routes are. establishing and, you know, competing against lower cost, higher carbon competitors. So there isn't then the level playing field. And, and as our costs go up, you can see the radius of where you can import products from .
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Toby Perkins
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Toby Perkins
Into the UK becoming ever, ever more expansive. Yeah. And if you were to think, I mean, I accept exactly what you're saying about the breadth of the industry. And so it being sort of difficult to pin down depending on who you're talking about. But if you were to. pinpoint the the key ones of key aspects of the list of challenges that you listed there, I mean, where would energy and.
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Speaker 1
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Speaker 1
Sector and to what extent they're coherent? Yeah, absolutely. So, I mean, I think it is clear from a Treasury perspective that they. recognize the economic and industrial potential of the energy transition. But when I look at the kind of gamut of the energy sector, all the different types of technologies and. transmissions through to everything that gets served to, to.
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Speaker 1
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Speaker 1
The supply end of that has been fairly well served by Treasury policy. You know, I look at look at policies like the contracts for difference, which has enabled a generation of large scale renewables to come to the market, which, you know, I could have I could have difficulties with any given policy. I could say it's frustrating. I'm not given a long term auction calendar saying, I'm going to procure X gigawatts this year and X gigawatts the next year. But nonetheless, over the last few years over over different governments, we have generally seen sort of a large degree of success when it comes to the supply side.
The demand side is the big open question. And particularly when we're looking at a complete. rewiring of our economy, where any plausible net zero trajectory, climate trajectory calls for sort of vast scale electrification, electrification, as as the lion's share of decarbonisation. And that's that has been running well, largely, it's been running in the wrong direction over recent years. And we actually need to increase demand now. And, you know, when I look at, for example, the recent autumn.
The demand side is the big open question. And particularly when we're looking at a complete. rewiring of our economy, where any plausible net zero trajectory, climate trajectory calls for sort of vast scale electrification, electrification, as as the lion's share of decarbonisation. And that's that has been running well, largely, it's been running in the wrong direction over recent years. And we actually need to increase demand now. And, you know, when I look at, for example, the recent autumn.
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Speaker 1
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Speaker 1
But nothing for non-domestic customers or very little for non-domestic. customers and significant cuts. We saw. £800 million worth of cuts to the Warm Homes plan. We saw a cut to a VAT exemption that exists for energy saving materials, things like insulation, heat pumps, etc. and so I think we're getting a lot of mixed signals at the moment where on the one side, it's clear that the government do recognise the potential of this. On the other hand, they're not only cutting grants to support households to electrify, but they're also making the. technology needed to electrify more expensive.
So I think there's a bit of a left hand, right hand problem going on at the moment. And I think that the demand side is perhaps not as well. understood from from the kind of policy making. perspective it ultimately, it all comes down to energy costs, because if we're going to.
So I think there's a bit of a left hand, right hand problem going on at the moment. And I think that the demand side is perhaps not as well. understood from from the kind of policy making. perspective it ultimately, it all comes down to energy costs, because if we're going to.
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Toby Perkins
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Toby Perkins
Government's own targets or the net zero targets that we have in legislation. But, I mean, you know, you say that the reality is and the evidence is showing us that right now electric vehicles are cheaper. So, you know, you're sort of saying, and I accept on on an. industrial basis. The truth of what you're saying, and we've just heard from two sectors affected by that. But I mean, isn't there a danger that even when the.
reality is that the .
reality is that the .
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Speaker 1
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Speaker 1
Add up, the public still aren't necessarily convinced? I think I mean, you are seeing significant take up of EVs and increasing take up, which is really positive to see. It's probably the the. biggest area in which electrification is going well, despite the issues that I'm sure colleagues will allude to. I mean, the fundamental problem, when we look across every bit of the economy that needs to.
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Speaker 1
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Speaker 1
Is that the incentive. systemically don't stack up. EVs are are a bit of an exception there. But when I look across the heat transition, whether you are a business or a house transitioning to electrified heat, largely when maybe if you look at lifetime costs, you can probably get the numbers to add up, but it's a significant outlay in order to get to that point. When I look across industrial.
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Speaker 1
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Speaker 1
It again. Also, once you've taken into account the complexity of getting, you know, your your grid connection soon, which is taking far too long once you've taken into account complexity of getting that technology in place, the financing required, and then finally the electricity costs, we're not in the right place. And I think a big missing piece for us in that autumn budget and in general in Treasury's thinking is.
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Speaker 1
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Speaker 1
We've had proposed. schemes like the targeted electrification discount, which never eventuated, which was going to be a targeted mechanism specifically for larger businesses that needed needed to invest in these technologies, but on the operating costs, were really struggling with it, and it just remains a missing piece. And I think the challenge here is that it is always in any given budget. It will always seem like the cheapest option not to invest in these technologies. But if we look at just the last five years, the UK as a whole has spent. £100 billion in extra costs procuring gas.
We haven't received a single extra molecule for that money. So what's the cost of not electrifying? And that's what's not present within, I think Treasury .
We haven't received a single extra molecule for that money. So what's the cost of not electrifying? And that's what's not present within, I think Treasury .
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Toby Perkins
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Toby Perkins
Thinking and within recent budgets from from in fairness successive governments. Yeah. But I mean, in fairness, this government has, you know, invested very. substantially in in the energy transition. I take your point about that specific area. But each of the witnesses that we've heard from so far, you know, have effectively said if government either spent more or for, for for more.
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Speaker 1
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Speaker 1
Government money could be better spent rather than just more spent? I think when it comes to I mean, just to take electricity bills as we've been on it, it is very clear that there is a long term saving by intervening now to lower electricity costs. I mean, we've done work on it with the CBI. PwC has done recent really good work on it. And the the economic. multiplier of lowering our. electricity costs closer to either European levels or G7 median is is, you know, is. massively higher than the forgone revenue. But inevitably there is some forgone revenue.
I don't think we can hide from that fact. I think beyond that, the real challenge is that I think we see we see quite a lot of short term thinking. And the energy. transition is, is a transition. And so, you know, we've had a cut of. £800 million from the Warm Homes plan, for example. We've also had a cut in the technology that people go out and buy as part of decarbonising your home. I think if I were government, I would say, right, I know that you want to decarbonise your home. You know, we we hope you would decarbonise your home.
You're going to put in a heat pump, let's say, or a heat network connection. So I need to look at the selection of things that underpin that from the outlay of, of the actual technology itself for the capital expense to the operating costs. And think what is a glide path? What is a pathway where we can get over the next 5 to 10 years to a point where we know that we can bring, let's say, subsidies for heat pumps down over time, because we know that electricity prices are also going down. But that's not what we see.
We don't see a coherent long term pathway toward that. We see small policy changes here or there. But if I'm a customer and I do have a heat pump, because if I'm going to go and talk about this stuff to folks like you, the least I could do is get one.
I don't think we can hide from that fact. I think beyond that, the real challenge is that I think we see we see quite a lot of short term thinking. And the energy. transition is, is a transition. And so, you know, we've had a cut of. £800 million from the Warm Homes plan, for example. We've also had a cut in the technology that people go out and buy as part of decarbonising your home. I think if I were government, I would say, right, I know that you want to decarbonise your home. You know, we we hope you would decarbonise your home.
You're going to put in a heat pump, let's say, or a heat network connection. So I need to look at the selection of things that underpin that from the outlay of, of the actual technology itself for the capital expense to the operating costs. And think what is a glide path? What is a pathway where we can get over the next 5 to 10 years to a point where we know that we can bring, let's say, subsidies for heat pumps down over time, because we know that electricity prices are also going down. But that's not what we see.
We don't see a coherent long term pathway toward that. We see small policy changes here or there. But if I'm a customer and I do have a heat pump, because if I'm going to go and talk about this stuff to folks like you, the least I could do is get one.
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Speaker 1
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Speaker 1
You know, the we are still at the point where the sums. largely don't add up for a lot of households, at least in the kind of immediate sense. And I think what we'd like to see from Treasury is if they think that. electrification is the long term future of this country. And our view is that that certainly is the case. And I think most other OECD countries are heading in that direction. Then we do need to have a long term plan.
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Barry Gardiner
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Barry Gardiner
But thank you for that. I'm going to bring in Barry Gardiner and then we'll go to Jonathan Davis. Thank you very much, sir. And Mr. Berman, you spoke about the the benefits for gas. And I wanted to ask you, because the IMF says that we are subsidizing our fossil fuels in this country by 59 billion a year. The OECD puts it at a much lower figure at about 26.7 billion. But they also reference the 14 billion for gas that you mentioned. Why do you think it is, given that we've signed Koffice, the the coalition for phasing out fossil fuel incentives, including subsidies, and that we've signed target 18 of the Global Biodiversity Framework, why do you think it is that the Treasury insists that we don't .
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Speaker 1
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Speaker 1
Right. That is, of course, a subsidy. Yeah, yeah. I mean, in that case, that. £100 billion number is that's not actually the government paying. That's that's all. customers have have paid simply to get the gas that they need for whether it's industrial or, or household purposes, that gas prices have done this over the last five years. And so there is a direct impact from that. There have also been subsidies, as you say.
I mean.
I mean.
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Barry Gardiner
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Barry Gardiner
I'm not sure I have an answer to that. It feels you're the guys, all three of you, who who do actually lobby for subsidies for your industry. Quite rightly, I'm not, you know, that's your job. And now you're quite rightly lobbying for subsidies for the just transition to a renewables clean energy. And that's great. But what about the subsidies that were going to fossil fuels that were .
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Speaker 1
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Speaker 1
Lobbied for in the past and are still there? So I can only speak for what we try and talk to policymakers about, which is at the moment, we move as quickly as we possibly can to a largely electrified economy with electrified technologies that don't require fossil fuels. And in the meantime, when prices are high, like at the moment when we have an international gas spike. Yes. I think, you know, the effect on on. particularly kind of low income households is such that it is warranted for the government to intervene. I could see how you could interpret that as a subsidy for fossil fuels, but we are very keen that we move ourselves off volatile fossil fuels as quickly as possible.
So I don't think I'm I'm out here advocating for for any more subsidies. And in fact, where there are de facto de facto subsidies or at least taxes on clean energy that gas doesn't receive. So, for.
So I don't think I'm I'm out here advocating for for any more subsidies. And in fact, where there are de facto de facto subsidies or at least taxes on clean energy that gas doesn't receive. So, for.
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Jonathan Davies
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Jonathan Davies
Need to address that problem. Thank you very much, Jonathan Davies. Thank you, chairman. I have some questions for Mr. Crouch. For the Society of Motor. Manufacturers and Traders. I'd just like to step back almost from from where we've been with with the chairman earlier. Obviously, we've committed, as many countries have, to an electric vehicle future. But would it be the view of your sector that we maybe should have followed the Japanese lead and pushed more.
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Speaker 4
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Speaker 4
I think the. industry is a bit divided on hydrogen. So, you know, at the moment, the hydrogen market in the UK for electric for hydrogen vehicles is, is pretty much nonexistent. So, you know, there's been a couple of. manufacturers that have brought hydrogen vehicles to the marketplace. But because there's no.
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Speaker 4
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Speaker 4
Particularly in the UK, you know, tend to be more aligning with the EU. regulations because, you know, the manufacturer, the, the global market is almost sort of split into Europe, Japan, US, and I suppose now China, you know, into those sort of specific regions. And so there. generally there's been the push towards electrification. We do tend to be a bit more sort of technology agnostic. So, you know, in the EU they have more targets around CO2 rather than specifically in the UK, we have, you know, the Zev mandate, which means you have to have, you know, zero emission vehicles rather than have a, a CO2 based approach, which enables you a bit more.
flexibility in terms of what technologies you can bring to the. market and can deliver the savings. So that gives you a bit more, you know, scope to, to work with what the customer.
flexibility in terms of what technologies you can bring to the. market and can deliver the savings. So that gives you a bit more, you know, scope to, to work with what the customer.
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Speaker 4
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Speaker 4
What the global market wants, etc.. So I think if you'd have gone down a very specific route, you know, that does reduce some of your flexibilities. I'd just like to just come back as well on, on. Mr. Perkins asked about saying electric vehicles were cheaper. I mean, I think that's in terms of the price of the vehicles. It's closing the gap, but there's still a gap. And then in terms of the running.
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Speaker 4
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Speaker 4
I think that's only based upon if you're charging at home and if you're facing public charging, then the costs can be prohibitively more expensive. And then you've still got to sell the vehicle at the end of the day. And the residual values of electric vehicles at this point in time are still relatively weak. So I think when you look at the total.
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Speaker 4
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Speaker 4
You know, it's a very costly transition. I think everybody's wedded to electrification. The industry, as I said, has brought more than. 180 battery electric vehicle models to the market. So, you know, there's a there's a huge array of product out there. The consumers are shifting towards it, but at the moment, they're still being heavily supported in that transition. And so if you had a more a trajectory, more in line with where we see natural demand moving.
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Jonathan Davies
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Jonathan Davies
But do you think the government should be pushing harder on biofuels and sustainable fuels? E-fuels, which in motorsport be used very successfully, because that would allow existing vehicles to be kept on the road for longer. And there is a case that, you know, a lot of steel goes goes into. manufacturing new cars, massive carbon emitter as a sector, lithium mining, huge. problem actually. Should the. government support that transition? Should it .
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Speaker 4
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Speaker 4
Be pushing on biofuels, e-fuels and sustainable fuels? I mean, I think I think new cars are generally shown to be much more efficient and so reduce their carbon. There's like carbon offsets compared to vehicles in use over quite a short period. But in terms of could more be done to decarbonise the fleet that we've already got there then? Yes, certainly. So I think the. industry and government is already working on whether or not you can raise the level of. biofuels in in petrol and diesel, and the existing fleet would still be able to run on that.
There's obviously concerns that if you raised it too much, certain vehicles wouldn't be able to use that because, you know, they weren't designed to run on that level of biofuel. And so that could have, you know, either. limitations for the reliability of the. vehicle or the longevity of the vehicle, etc.. But yeah, there can certainly be a lot more that could be done. And it's worth remembering that, you know, those types of technologies could still be very important in the .
There's obviously concerns that if you raised it too much, certain vehicles wouldn't be able to use that because, you know, they weren't designed to run on that level of biofuel. And so that could have, you know, either. limitations for the reliability of the. vehicle or the longevity of the vehicle, etc.. But yeah, there can certainly be a lot more that could be done. And it's worth remembering that, you know, those types of technologies could still be very important in the .
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Jonathan Davies
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Jonathan Davies
Commercial vehicle sector as well. And support on that front. I need to bring it back to the Treasury, if I may, since the focus of this. But that's really useful information. We know that obviously, through the uptake of electric vehicles, which many people celebrate, we've seen a decline in vehicle excise duties because they've had the preferential terms with. We will ultimately see a decline in fuel duty coming into the Treasury. And I think also the benefit in kind system has also been very generous to company car users. So that's meant there's been a hit to the .
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Speaker 4
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Speaker 4
Much as you might have thought because I mean most of the the year isn't it. Well, I think I mean, I mean, the first year rates doubled in 2025. And so that was a significant uplift in how much the first year rates paid. And then the standard rate generally goes up by the rate of inflation. There tends to be more vehicles on the road. As you mentioned earlier, vehicles last longer. So yeah.
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Jonathan Davies
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Jonathan Davies
So do you have that element to it? Yeah. I just wondered, I guess as a sector, you're looking for. certainty in terms of what the government does. And. Yeah, definitely. Do you think do you think we've managed to strike a balance of fairness between different groups of motorists as we've tried to maintain .
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Speaker 4
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Speaker 4
Revenue, whilst also. supporting the transition to net zero? I mean, it's clearly a challenging situation. And, you know, we understand that fuel duty is, you know, set at a level and then, you know, it was expected to. increase and then, you know, hasn't because there's been a load of external shocks, inflationary pressures. And so, you know, people have and, you know, goods being transported.
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Speaker 4
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Speaker 4
But, you know, you always have to look at the delta between running an electric vehicle to running a ice vehicle. And, you know, if there's support on one side and there's not the corresponding support on the other side, then that could create a differential. And that's some of the concerns that we have around EV at this point in time, where EV is still set to come in, but the fuel duty rates have been frozen. And EV, you know, rates haven't been are still sort of set as they are. But yeah, everybody wants certainty, long term certainty.
And for electric vehicles to have that support moving forward. So things like vehicle excise duty, you know, longer term vision of where that's going to without the big shocks that we had. Company car tax rates are set out for a few years in advance, but could certainly .
And for electric vehicles to have that support moving forward. So things like vehicle excise duty, you know, longer term vision of where that's going to without the big shocks that we had. Company car tax rates are set out for a few years in advance, but could certainly .
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Jonathan Davies
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Jonathan Davies
Be set out for longer and electric vehicle rates be more supportive moving forward. But if I may. But I'm also very mindful that for many people on a low income living in fairly ordinary housing, they don't have the benefit of the off road charging point on their home. And actually the they pay much higher charges to use the public points. And I'm conscious of time. But one of the reasons the electric vehicle sector has grown so well in the last few years is the higher companies have been very proactive in taking up electric vehicles. You talked about pay per mile.
That's going to be a challenge for them, isn't it, in terms of how they monitor and report those mileages back .
That's going to be a challenge for them, isn't it, in terms of how they monitor and report those mileages back .
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Speaker 4
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Speaker 4
Will, they will be voluntary reporting of how many miles a vehicle. The government, well, the government changed the rules for the first couple of years. So you wouldn't have to take the vehicle in to have a, a mileage check, because obviously that would have been very expensive for the user and inconvenient. So that was a really welcome change that they didn't have that you do have after the three years, then you do have your MOT, so you would have a check then. So ultimately the Treasury would get the money for the mileage, the vehicles done.
But and typically, you know, vehicles are normally accessed on like a three year contract period. So, you know, in a lot of cases, the first owner would be paying the, the rates for the first three years on the vehicle. So, so I think what the government did on that side was, was pragmatic and quite helpful. But clearly, if you've got a large business, you know, with a lot of reporting to be done, that's going to be really challenging. I know government has looked at EV connect. They announced in the budget where they would, you know, use the connectivity on the vehicles to do this.
But we don't we haven't had much insight into, you know, really how that will work and what information will be needed to be provided, how that will align with, you know, consumer rights and GDPR and all the rest of it. So, you know, there's a lot of issues around there and we just still going back to even, you know, if there had been a lot more. consultation and discussion with industry and other stakeholders at the beginning, I think we would .
But and typically, you know, vehicles are normally accessed on like a three year contract period. So, you know, in a lot of cases, the first owner would be paying the, the rates for the first three years on the vehicle. So, so I think what the government did on that side was, was pragmatic and quite helpful. But clearly, if you've got a large business, you know, with a lot of reporting to be done, that's going to be really challenging. I know government has looked at EV connect. They announced in the budget where they would, you know, use the connectivity on the vehicles to do this.
But we don't we haven't had much insight into, you know, really how that will work and what information will be needed to be provided, how that will align with, you know, consumer rights and GDPR and all the rest of it. So, you know, there's a lot of issues around there and we just still going back to even, you know, if there had been a lot more. consultation and discussion with industry and other stakeholders at the beginning, I think we would .
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Sammy Wilson
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Sammy Wilson
Leading to changes in the things they invest in and reducing energy consumption. What evidence is there. And I suppose it's mostly to. Mr. Kreutzer and Mr. McDermott, what evidence is there in your. industry that the taxes which have been enforced on your your. businesses have actually led to the kind of change in. behaviour in. investment that the.
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Sammy Wilson
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Sammy Wilson
Costs go up here, output goes down here and we import product from in the case of your industry, is it because first of all, you have a big export market anyway, and carbon taxes are not being imposed in the countries where you're exporting to. And secondly, a lot of the goods which are sold now in the UK are from foreign companies that don't have the same tax burden on them. So exactly. And what what would have to happen then apart from the, the, the tax, I mean, the government said it believes the tax is by putting your costs up, should change how what you invest in the kind of technology, invest in what what would have to happen.
alongside the carbon. taxes to change your.
alongside the carbon. taxes to change your.
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Speaker 2
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Speaker 2
And we've got carbon taxes in the. In the UK, we compete against countries where they haven't got carbon taxes. They can then. undercut us. So as it stands, we're in the emissions trading scheme. We get free allocation, which which. reduces but doesn't eliminate our carbon leakage exposure. I think where we need to move to longer term is to to introduce things like carbon border adjustment mechanisms. Those are complex. They're easy to understand the concept. But in terms of. operationalizing them and implementing, they're very difficult to, to implement. So the European Commission, the UK government has kicked the tires on applying cbam .
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Speaker 2
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Speaker 2
Solve your problem of making competitive overseas because. Exactly. I mean, that's, that's the kind of downside on Cbam. Cbam just works purely on the domestic. market and on your export markets. There's no benefit then. In fact, it makes carbon leakage worse because if you start to lose, then free.
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Speaker 2
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Speaker 2
Yeah, we need much more. Does any of that happen at the moment? We get bits, we get bits of it, but it's a bit hit and miss. You know, in the in the EU, ETS is a much clearer mandate for recycling the revenues into supporting decarbonization. That doesn't apply in the in the UK. So there are elements, there are bits and pieces. There was a industrial energy. transformation fund, but that's now that's now gone. Recently announced there was a ceramic sector support scheme, but it's it's it's pockets. It's here and there. And, you know, we need to see on a much broader scale, much greater recycling of revenue from carbon.
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Speaker 4
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Speaker 4
Which perhaps would be different from what happens in ceramics? It's largely exactly the same. And we do reports. We have sustainability report. We've done it for like 25 years plus. So, you know, we are reporting about performance. You can see that the industry is getting ever more. environmentally cleaner and reducing. emissions because that is a cost. And so industry has to reduce its costs to be competitive. There needs to be a fundamental change in the price of energy to make it much more competitive in the UK. Because, you know, at the moment we I think our electricity costs are designates figures were, you know, like.
115% above the EU average. You know, you just can't compete with those types of costs, especially as you move towards ever more electricity intensive production techniques. Certainly, I would agree with everything Andrew said about, you know, there's a lot of money. You know, it's a bit like fuel duty, you know, the price of your petrol. A large chunk of that is tax, a bit like your electricity costs. You know, I think only a third of the electricity costs pays for the electricity. The rest is all taxes and other costs on top of that. And so there needs to be big changes to make things more.
115% above the EU average. You know, you just can't compete with those types of costs, especially as you move towards ever more electricity intensive production techniques. Certainly, I would agree with everything Andrew said about, you know, there's a lot of money. You know, it's a bit like fuel duty, you know, the price of your petrol. A large chunk of that is tax, a bit like your electricity costs. You know, I think only a third of the electricity costs pays for the electricity. The rest is all taxes and other costs on top of that. And so there needs to be big changes to make things more.
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Speaker 4
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Speaker 4
And then yeah, definitely agree with recycling more of the monies that industry does pay to support the industry to. transition as well. As for our sector, we have sort of some technologies which are really challenging to decarbonise. So, you know, the paint shops typically in the, in the, in a vehicle automotive plant, you know, they're like the largest energy users. They are gas powered, you know, that's what you used to like drive the vehicles, etc.. electrification of those is, is challenging technology wise, but also cost wise because electricity just costs so much more than gas.
So to. decarbonise that. process is extremely expensive. A paint shop itself is, is like, you know, hundreds of millions of pounds. And, you know, you tend to only invest in them once every 25 years type thing. So, you know, they're big investments. And so, you know, you have those sort of cyclical challenges. But at the moment, you know, that that .
So to. decarbonise that. process is extremely expensive. A paint shop itself is, is like, you know, hundreds of millions of pounds. And, you know, you tend to only invest in them once every 25 years type thing. So, you know, they're big investments. And so, you know, you have those sort of cyclical challenges. But at the moment, you know, that that .
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Speaker 1
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Speaker 1
Backdrop that we have in the UK doesn't make it super attractive to do it here. If I may just briefly. The one example where this really has worked well is the energy sector. And it's just worth highlighting. I mean, if I look at electricity generation, we've reduced our emissions by. 80% since 1990. That is in large part due specifically to carbon pricing, a combination of two two carbon prices, the emissions trading system, and then the carbon price support, which was a sector specific one for electricity. But I think there is some lessons to be learned there.
The first is you need a balance of carrot and stick. It cannot just be stick. I think that is completely reasonable. And so for the energy sector, we saw sector specific subsidies, mechanisms like the contracts for difference, the renewables obligation before it to bring those new technologies to the for because the the signal that you shouldn't invest in the in the dirty stuff, it wasn't strong enough by itself. It needed to be enhanced through other mechanisms. And so I think, you know, to, to the challenge that my colleagues have put around carbon leakage, protection, recycling revenues, I think these are these are really good challenges.
And I would I would completely agree with them. But I think the difficulty here is that we I think we hear a lot from, you know, politicians and also industries who, who kind of call for an end to various different. taxes and carbon prices and other mechanisms. And all I would say from a decarbonisation standpoint is if we are going to take a carrot only approach to.
The first is you need a balance of carrot and stick. It cannot just be stick. I think that is completely reasonable. And so for the energy sector, we saw sector specific subsidies, mechanisms like the contracts for difference, the renewables obligation before it to bring those new technologies to the for because the the signal that you shouldn't invest in the in the dirty stuff, it wasn't strong enough by itself. It needed to be enhanced through other mechanisms. And so I think, you know, to, to the challenge that my colleagues have put around carbon leakage, protection, recycling revenues, I think these are these are really good challenges.
And I would I would completely agree with them. But I think the difficulty here is that we I think we hear a lot from, you know, politicians and also industries who, who kind of call for an end to various different. taxes and carbon prices and other mechanisms. And all I would say from a decarbonisation standpoint is if we are going to take a carrot only approach to.
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Sammy Wilson
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Sammy Wilson
Okay. It was just. Just come to one last question then. The government obviously has set this is an. objective carbon pricing, environmental. taxes to change. behaviour and but also at the same time, not to impact on. competitiveness and not to detract or diminish investment. What criteria would you, your industries use to make a judgement and to make an assessment as to whether or not those.
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Speaker 4
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Speaker 4
Whether those objectives are being achieved? I mean, I think you could have obviously one assessment. It could be whether or not the industry is still there and still functioning and still growing. You know, we've done sort of a study with all around international competitiveness. And so, you know, you could look at all different metrics to see, you know, what supportive there. And then I think on the environmental performance, you know, you obviously do have reporting going on there and seeing where you're moving to, but you have to, I think, as we've all said, you've got to balance everything out and ensure that you know what you're doing on one side .
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Speaker 4
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Speaker 4
And the government is not achieving the objectives which they set out is that I think it could certainly do a lot more. I mean, there's still a lot of investment going in the automotive sector, you know, so, I mean, I think in September, there was. £1 billion announced by three companies in the UK. You know, we've announced. 14 billion since sort of Covid times, largely to do with. electrification and the shift to new products. So there's a lot of investment still going in. But at the same time, you've had big announcements which haven't happened , and you've generally lost.
manufacturing in the UK and lost volume in the UK quite considerably. And that's putting the supply chain at enormous pressure. So yeah, I think it's certainly been very challenging. Obviously there's a myriad of factors at play here. And it's not just, you know, Treasury policies on on environmental taxation .
manufacturing in the UK and lost volume in the UK quite considerably. And that's putting the supply chain at enormous pressure. So yeah, I think it's certainly been very challenging. Obviously there's a myriad of factors at play here. And it's not just, you know, Treasury policies on on environmental taxation .
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Speaker 2
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Speaker 2
We need to have much greater eye on consumption emissions alongside territorial emissions when evaluating and monitoring policy, but also as well, we need to be looking at import data. So HMRC import data for certainly across the the different ceramic products are all invariably showing quite rapid increases in the amount of of imports. And if we compare that to our output, our outputs going down and the imports are going are going up. So yeah, looking at import levels, looking at jobs, looking at public and.
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Manuela Perteghella
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Manuela Perteghella
Thank you. Thank you very much, Manuel. Thank you. Chair. My questions are for Mr. Berman and Energy UK. So we'll start with looking at the tax and fiscal framework. Do you think that the current tax and fiscal framework provide effective and. sufficiently stable. incentives for. investment in clean. generation networks and other.
infrastructure needed to deliver the. government's objective on clean .
infrastructure needed to deliver the. government's objective on clean .
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Speaker 1
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Speaker 1
Electrification and, of course, net zero? Thank you. So I think when I look at the supply side, it's a slightly better. picture for networks particularly. We've got a very well-worn road through the what's called the Rio sort of price control framework, which runs through Ofgem, which, which governs the way that that works. We're also seeing more competition being introduced into those areas, which are obviously traditionally monopolies. I think beyond that. generation is a is a slightly trickier area where we have had these these good kind of revenue support mechanisms, like the contracts for difference. They have been really successful.
But you've seen a lot of chopping and. changing every year. I mean, it wasn't that long ago. We're now onto eight this year. Allocation round eight allocation. Round five. There was a massive game of chicken between industry and government where government said, we think you can do it this cheaply. And industry said, no, no, we can't. And they went ahead anyway. And shockingly enough, no one bid into the process and it's been a slightly messy affair. We've got it back on track. But now, even just in the last day we've heard from, from one of the ministers in in Desna's that they're going to be pausing.
R9 because, you know, they want to have reforms to the program. The issue here is there is a. presumption from successive. governments that the supply chain and worker base is a rubber band that you can bend and just have snap back when you want to make significant changes. And we we saw, for example, with AR five, where we had essentially a stunted year with no offshore wind being being built, you saw workers move literally just move out of the UK because there was not enough work for them. And you saw developers being stuck with significant amount of dev.
So you'd have, let's say, your offshore, your certain sort of offshore payments you had to pay to the Crown Estate just to keep your licence going, even though you didn't know whether you were going to bid into the next round, even though you didn't know whether you were going to get a contract. So there is a bit of a lack of, of a sort of pathway as to exactly what the government wants. And it's not to say that I think the industry will disagree with it, just that I don't know what it is. I can't see it today.
I think beyond that, when I look across the kind of gamut of.
But you've seen a lot of chopping and. changing every year. I mean, it wasn't that long ago. We're now onto eight this year. Allocation round eight allocation. Round five. There was a massive game of chicken between industry and government where government said, we think you can do it this cheaply. And industry said, no, no, we can't. And they went ahead anyway. And shockingly enough, no one bid into the process and it's been a slightly messy affair. We've got it back on track. But now, even just in the last day we've heard from, from one of the ministers in in Desna's that they're going to be pausing.
R9 because, you know, they want to have reforms to the program. The issue here is there is a. presumption from successive. governments that the supply chain and worker base is a rubber band that you can bend and just have snap back when you want to make significant changes. And we we saw, for example, with AR five, where we had essentially a stunted year with no offshore wind being being built, you saw workers move literally just move out of the UK because there was not enough work for them. And you saw developers being stuck with significant amount of dev.
So you'd have, let's say, your offshore, your certain sort of offshore payments you had to pay to the Crown Estate just to keep your licence going, even though you didn't know whether you were going to bid into the next round, even though you didn't know whether you were going to get a contract. So there is a bit of a lack of, of a sort of pathway as to exactly what the government wants. And it's not to say that I think the industry will disagree with it, just that I don't know what it is. I can't see it today.
I think beyond that, when I look across the kind of gamut of.
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Speaker 1
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Speaker 1
I've got to go and make sure I can get a really good accredited installer. So I've got to sort out the accreditation bodies and I've got to make sure it's really robust and I've got root to roots to redress. I'm probably not going to have the money to buy this stuff outright. So I need a financing mechanism. Just in the last few weeks, we've had some government finance for the first time called the Warm Homes Loan. That's taken two years to come since this government was elected to come in with. They had previously promised it.
I've got to make sure that, you know, the technology is available. I've got to, you know, get through some sometimes some planning hoops. There are lots of pieces to that puzzle. And, and I do think the government is serious and the Treasury is serious about attacking them. But at the moment it's not it's not quite joined up enough that it's making enough of a difference. And so whilst we are seeing, you know, a slow but sure increase the uptake of things like the boiler upgrade scheme, which. underpins heat pump uptake, we are some distance away .
I've got to make sure that, you know, the technology is available. I've got to, you know, get through some sometimes some planning hoops. There are lots of pieces to that puzzle. And, and I do think the government is serious and the Treasury is serious about attacking them. But at the moment it's not it's not quite joined up enough that it's making enough of a difference. And so whilst we are seeing, you know, a slow but sure increase the uptake of things like the boiler upgrade scheme, which. underpins heat pump uptake, we are some distance away .
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Manuela Perteghella
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Manuela Perteghella
From where both the government and the carbon budgets, I think, would like to be. Yeah. And I'm grateful that you mentioned the, you know, the reduction of of funding from the Warm Homes plan, because obviously I wanted to, to ask you whether you think. Yes, the kind of the Warm Homes loan scheme and the boiler upgrade scheme, are they going to be enough to decarbonise our homes, especially in rural constituencies like mine, where I have off grid homes . relying on at the moment on heating oil and LPG? Yeah. So, you know, and of course, we got this 1 billion reduction.
What else has to be done on that? What would you like to see done so that we can get, you know, we can get people taking up heat pumps and. retrofitting their homes .
What else has to be done on that? What would you like to see done so that we can get, you know, we can get people taking up heat pumps and. retrofitting their homes .
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Speaker 1
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Speaker 1
Easily and, and motivate them to do so. Of course. And there has I should make the government's case and say there has been a recent increase to the boiler upgrade scheme specifically for off grid homes, which is which is fantastic because those are some sort of quite low hanging fruit in terms of decarbonisation. Look, I mean it without a substantive change to essentially the spark gap, the difference between electricity prices, the ratio between them, it is going to be a real uphill battle to get any large scale. decarbonisation of heat. And you if you look at any graph which shows the spark gap on one side, an uptake of clean heat on the other side, you will see that essentially as soon as electricity gets cheaper, people start to put more of these technologies into their homes.
So I do think that has to be paramount. I don't think there's a massive problem in terms of the subsidy.
So I do think that has to be paramount. I don't think there's a massive problem in terms of the subsidy.
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Speaker 1
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Speaker 1
And I think we're probably in a similar situation sometimes to colleagues on the EV side, where actually the the amount is, I think, very fair. If anything, over time, not yet. We should be decreasing the amount because it's not sustainable to offer. 7500 pounds to every single country, every single house in the country, clearly. But I do think that there is a there is a problem that the numbers are so low. There are about 2% at the moment of households have a heat pump, for example. The numbers are so low that that you are. You're having to build a lot of trust in the kind of nascent years of these technologies as as you get them out.
And, and that is working over time. So just to give you an example, I, I signed up for a scheme run by Nesta where you can visit a heat pump and I sign up so that other people can visit my heat pump. And you might think it's a bit silly. I've had three inquiries this week for people that want to visit the heat pump. They they're interested in this technology. They want to know about it. It's an unknown. Do you stay warm? Is it is it expensive? Is there much disruption? But I think some of this is is actually in the kind of public.
understanding and engagement with this issue. Once we've got things like electricity prices sorted, we then need to get to a point where you know someone, you know a friend or a neighbour or a cousin that has had a heat pump put in. You know, that it's not, you know, it's not going to require massive changes in your home. It's actually going to lead to a better experience, a warmer household. There's just, it's just not there's not enough people that have them at the moment .
And, and that is working over time. So just to give you an example, I, I signed up for a scheme run by Nesta where you can visit a heat pump and I sign up so that other people can visit my heat pump. And you might think it's a bit silly. I've had three inquiries this week for people that want to visit the heat pump. They they're interested in this technology. They want to know about it. It's an unknown. Do you stay warm? Is it is it expensive? Is there much disruption? But I think some of this is is actually in the kind of public.
understanding and engagement with this issue. Once we've got things like electricity prices sorted, we then need to get to a point where you know someone, you know a friend or a neighbour or a cousin that has had a heat pump put in. You know, that it's not, you know, it's not going to require massive changes in your home. It's actually going to lead to a better experience, a warmer household. There's just, it's just not there's not enough people that have them at the moment .
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Manuela Perteghella
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Manuela Perteghella
Widespread cut through with the public, if I'm being really honest. So that that takes me to my next question, which obviously, the. budget also announced several measures to reduce energy costs, including changes to electricity policy costs and gas standing charges. What impact might this have on. incentives to switch from gas to lower carbon. technologies to heat pump, make, you know, get the warm homes loan and and decarbonise Europe? And what further .
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Speaker 1
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Speaker 1
The removal of VAT from household electricity bills. They also did this change to the gas standing charge, where essentially there were a bunch of costs that are recovered through standing charge on gas that's going to be moved to the unit rate. That will be a process that I imagine take take a year or two. It is not without its.
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Speaker 1
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Speaker 1
I should add, because what is essentially going to happen is that the unit rate for gas becomes higher. So if you are in a high gas usage household and often you know these households that can't help it. It is a large family with a badly insulated home. It is an immunosuppressed household that has to have the heating on the whole time. I think whilst I'm generally supportive and the sector is generally supportive of that move on the gas standing charge, there are some most people will be winners, but there will be some losers and the losers.
The impact will be quite significant for them. And what we didn't see as part of the budget was any attempts from the government to say, we're going to try and help those people that lose out. We know there will be some losers. Every policy comes with pros and cons. We all understand that. But there will be some distributional consequences. We're going to get better at our targeting to make sure we can get help to those households. But all things being equal, those two mechanisms should shift the electricity to gas, spark gap in favour of electrification.
And then there are some kind of longer term measures around trying to get bills under control and things like that, which are which are all welcome. But I mean, these are, you know, these are all things, you know. affecting costs that might have arrived on your electricity bill, not costs that are currently there. Today. We still have further to go. And I completely recognise the constrained fiscal circumstances of of the government. But all I'd say is, you know, the, the mechanism that they're now using to, to provide, I think it's £100 to, to households within certain council tax bands.
This is expensive. The amount that people are having to pay for increased gas bills is incredibly expensive.
The impact will be quite significant for them. And what we didn't see as part of the budget was any attempts from the government to say, we're going to try and help those people that lose out. We know there will be some losers. Every policy comes with pros and cons. We all understand that. But there will be some distributional consequences. We're going to get better at our targeting to make sure we can get help to those households. But all things being equal, those two mechanisms should shift the electricity to gas, spark gap in favour of electrification.
And then there are some kind of longer term measures around trying to get bills under control and things like that, which are which are all welcome. But I mean, these are, you know, these are all things, you know. affecting costs that might have arrived on your electricity bill, not costs that are currently there. Today. We still have further to go. And I completely recognise the constrained fiscal circumstances of of the government. But all I'd say is, you know, the, the mechanism that they're now using to, to provide, I think it's £100 to, to households within certain council tax bands.
This is expensive. The amount that people are having to pay for increased gas bills is incredibly expensive.
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Manuela Perteghella
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Manuela Perteghella
They're more of a first step, I would say, on that journey. Okay. Thank you. The government has approved the jackdaw gas field as well and announced this new energy wealth fund . Can revenues from fossil fuels be ring fenced and used to finance the transition away from fossil fuels themselves? Or does that create tensions between the. government's climate, energy.
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Speaker 1
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Speaker 1
Security and its fiscal objectives? A very good question. I don't think it does create tensions, and I would certainly be supportive of of hypothecating any revenues that come from from the kind of upstream oil and gas extraction in the North Sea and using them. Well, we haven't got any clarity on how it's going to be used. But but using them for some part of the decarbonisation process or indeed for the just transition process in places like Aberdeen to help people transfer from oil and gas sector to offshore wind and things like that. I think if I'm if I'm being really honest, these are probably actually relatively small sums in the context of the entire energy transition.
They are welcome. But but, you know, the, the amount of investment that is required now is, is staggering. And it is largely happening. But this is this is private capital. I mean, if the government were to were to to pay for the entirety of the net zero. transition themselves, it would be like an additional defense budget that they added on. So we know that. 70 or 80% of the costs of decarbonisation will be borne by the private sector. And that's absolutely how it should be in terms of that, that tension there. I mean, my my understanding is that there were specific criteria being used for the jackdaw approval.
I imagine those same sorts of criteria balancing out emissions, energy.
They are welcome. But but, you know, the, the amount of investment that is required now is, is staggering. And it is largely happening. But this is this is private capital. I mean, if the government were to were to to pay for the entirety of the net zero. transition themselves, it would be like an additional defense budget that they added on. So we know that. 70 or 80% of the costs of decarbonisation will be borne by the private sector. And that's absolutely how it should be in terms of that, that tension there. I mean, my my understanding is that there were specific criteria being used for the jackdaw approval.
I imagine those same sorts of criteria balancing out emissions, energy.
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Speaker 1
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Speaker 1
The economic impact, etc., will be used for Rosebank or for any future projects. So I won't comment on those, but I, I don't think that it necessarily. incentivizes them, not least because the two. fundamental things that. essentially stop any large scale projects beyond what is currently within the licensing pipeline. So the, the ban on future. licences and then the taxation regime for oil and gas. The UK, for better or worse, is not conducive to investment in upstream oil and gas extraction, particularly for new licences, which even if you could get them, you can't. So I don't particularly think those two things are in tension.
If we're going to get money .
If we're going to get money .
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Speaker 1
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Speaker 1
In the net transition? Yes. I mean, it would certainly the the way that the the EPL works is would mean that moving to the oil and gas kind of price mechanism would enable a higher degree of certainty. I think probably if you go and talk to more on the kind of specific upstream side, they will still say that they will have some issues with it. But yes, because because of the way that it that it kicks in, that it's a. 35% tax above a certain a certain threshold, which I think is $90 a barrel or.
90PA therm on, on gas in, in 2026, 2027. That seems like a sort of a reasonable place to end up. But ultimately, I mean, this is this is a decision regardless of the kind of tax element, I think the government, any government needs to decide, does it is it in the best interests of the UK to have these projects for energy security reasons, for.
90PA therm on, on gas in, in 2026, 2027. That seems like a sort of a reasonable place to end up. But ultimately, I mean, this is this is a decision regardless of the kind of tax element, I think the government, any government needs to decide, does it is it in the best interests of the UK to have these projects for energy security reasons, for.
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Speaker 1
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Speaker 1
For economic growth reasons? If it decides that it should have them, then you should have a taxation regime designed to be able to attract investment. If it doesn't want that investment because it thinks it's not in the best interest of the country, then of course, you just tax it to, to, to nothing. But it feels like we're in a bit of a middle ground at the moment where we still have a taxation regime that essentially says we're not interested in any future large scale oil and gas extraction.
That's a legitimate policy aim,
That's a legitimate policy aim,
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Speaker 3
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Speaker 3
But the the. environment isn't conducive to. investing in. electrification and technology. So as a sector, we very few of our member companies get benefits under the British. Industry Competitiveness Scheme, because that would reduce electricity by electricity costs by 25%. Only a handful of our members get that. Only a handful get British industry supercharged, which drops it by 50%. So because of that, the the economics of electrification don't stack up.
It's a key. decarbonisation avenue .
It's a key. decarbonisation avenue .
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Toby Perkins
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Toby Perkins
For us. But the economics just simply don't stack up at the moment. Well, thank you very much for making the committee aware of that. And we'll certainly include that in in our evidence. So Mr. Croucher, Mr. McDermott and Mr. Bowman, thank you very much indeed for an excellent, informative session. We will briefly pause before the second panel. Begins.
But we bring this first .
But we bring this first .
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Toby Perkins
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Toby Perkins
Order! Well, welcome, everyone to the second panel event we have today on the Treasury and Climate and Nature Delivery. Delighted to be joined by Miss Jill Rutter, the senior fellow at the Institute for government, and Mr.. Jacobs from the University of Sheffield. Can I first just ask you to introduce yourselves and to let us know in the first instance, whether you think that the Treasury is emphasis on sort of expenditure.
control and fiscal. discipline creates barriers to investment in long term .
control and fiscal. discipline creates barriers to investment in long term .
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Speaker 5
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Speaker 5
I was at the Treasury for quite a long time, but also quite a long time ago. And then I was. reincarnated as director of Strategy for Sustainable Development at Defra, where I worked with Mr. Gardner as one of our very excellent ministerial team back then. So does the Treasury. Does it create barriers? I'm not in. principle to that spending any more than any other type of public expenditure. I mean, the Treasury obviously is in control. You know, such fiscal aggregates. It is then up to the. cabinet and in particular, number ten and the Treasury to decide what the.
priorities are and how they want to regard that. And I would say while a lot of the emphasis is on the Treasury as an expenditure controlling department, the Treasury actually has lots of other interests. It sponsors the financial services industry. It has a very big interest in growth, the supply side and regulation that may flux a bit depending on who is chancellor. And it also is really the sole.
priorities are and how they want to regard that. And I would say while a lot of the emphasis is on the Treasury as an expenditure controlling department, the Treasury actually has lots of other interests. It sponsors the financial services industry. It has a very big interest in growth, the supply side and regulation that may flux a bit depending on who is chancellor. And it also is really the sole.
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Speaker 5
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Speaker 5
So I mean, do you do you take that point at all? I think that is very valid. I would say the. Treasury is a civil service department. It is the. Chancellor and the ministers who make those decisions. But I do think one of the interesting things is that this area, and this may be a. reflection of the relative. weakness of relevant sectors of state, has been very.
vulnerable to Chop and changing policy, whether it's on that, whether it's on. investment in carbon capture and storage. If you looked when Rishi Sunak was.
vulnerable to Chop and changing policy, whether it's on that, whether it's on. investment in carbon capture and storage. If you looked when Rishi Sunak was.
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Speaker 5
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Speaker 5
He introduced a thing called the Green Homes grant as a sort of Covid employment. measure and turned it off incredibly quickly. And actually, one of the things that I think the Treasury. institutionally fails to do when it is thinking about these projects is it doesn't seem to. understand it's sort of market shaping role that it takes time to gear up to have enough accredited. suppliers to actually do that sort of. necessary retrofit under something like the Green Homes grant. And then you find if you do that for a sort of limited period and switch it off.
suddenly the people who did invest in upskilling their. workforce to undertake those sorts of projects and take advantage of the grants.
suddenly the people who did invest in upskilling their. workforce to undertake those sorts of projects and take advantage of the grants.
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Speaker 5
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Speaker 5
You suddenly. discover that actually that was a wasted investment because that tap has turned off. And I think, you know, there may be other areas of policy which are as vulnerable to that chopping and changing, but I certainly think that that is a fair. commentary on the last sort of 15, 20 years of policy in this area that has been subject to, often to an on and off switch without regard for .
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Speaker 6
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Speaker 6
Discourages long term investment that might support the climate transition. Thank you, chair. Good afternoon, everybody. Very glad to be here. Thank you for inviting me. My name is Michael Jacobs. I'm emeritus professor of political economy at the University of Sheffield and visiting professor in the Department of Economics and Global School of Sustainability at the LSE. And probably more.
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Speaker 6
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Speaker 6
When we were rudely ejected by the electorate. And I was mainly focused on on environment, climate and energy. So I think the term treasury covers a lot of different things. And I know you've covered I'm sure you've covered this before. You've certainly covered it in previous inquiries of the Environmental Audit Committee, to which I was also invited. So Treasury can be the.
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Speaker 6
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Speaker 6
Certainly has some cultural biases and so on. But having worked for Gordon Brown, I can tell you that a determined Chancellor can command what his or her. officials do. The process point is the one I want to come to here, because the Treasury has a process which is completely unique, which is called the budget. We still have only one of those a year, although don't be surprised if there is a another fiscal statement made, but the budget is completely unlike any other process because the Chancellor can make decisions in a budget which the. Treasury would never allow any other Department to make , with no scrutiny and no legislative scrutiny, not just no scrutiny of the Chancellor and what he or she is doing, but no legislative scrutiny because it goes into a finance bill and and the finance bill goes through without any of the scrutiny that an environmental bill put forward by Defra or Energy Climate Change Bill put forward by Desnos would have.
And in a budget there is now an.
And in a budget there is now an.
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Speaker 6
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Speaker 6
Which of course does not come from my old boss at all, but now an incentive to fiddle. We had a lot of measures in the budget passed of a week or so ago, 98, I think there were. Gordon Brown was not was known sometimes to pass lots of little measures. And those measures don't have any scrutiny. They don't have. And they can be extremely disruptive to the to to markets in the real world and business. investment and so on. And this is a problem. And and I don't think it's got it's had enough attention and it's nothing.
It's not about the environment. This is true in any field. The Chancellor can just muck around with the tax system and indeed.
It's not about the environment. This is true in any field. The Chancellor can just muck around with the tax system and indeed.
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Toby Perkins
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Toby Perkins
Never allow any other department to do. Thank you. Now, to what extent do you think that the. Treasury's challenge. function help or cherry the Treasury's challenge function help or hinder departments in developing and delivering climate and nature policies? Mr. Jacob, particularly where these involve significant upfront .
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Speaker 6
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Speaker 6
So you will have heard, I hope, from people with more recent experience. But my general view of this is that there are two. There are two major problems. So one is the Treasury is is very powerful. I mean, literally has veto power on almost all expenditure decisions. But it is the the assessor, not the. proposer of the. policies in every area except those of fiscal policy and some, some growth policy. And so the Treasury's job is to say yes or no, and quite often no, and quite often no in a structural sense, because there's always too much expenditure demand from departments.
So it has to say no to some things. But I was always very frustrated that some of the brightest civil servants that I encountered in Whitehall were in the Treasury saying no to things, rather than in the other. departments proposing things. And that, I think, is a structural problem. And there is still a cachet in being a Treasury civil servant. And and it is kind of true, and I don't I mean, I suppose it is still true. And other departments might question this, whether the brightest, you know. graduates in the fast stream go into the Treasury.
But insofar as that is still possible, or even if they're not the brightest, but they're just very bright, it always frustrated me that they all they did with the policy was to say yay or nay. And I think that's a that's a structural problem because in the end, good policy making is. innovative and. creative and has to find ways of overcoming problems, satisfying different stakeholders and so on. And I would like to see the brightest civil servants trying to do those, those things. But there's another way in which this is generally true, which is if you have even three year spending.
So it has to say no to some things. But I was always very frustrated that some of the brightest civil servants that I encountered in Whitehall were in the Treasury saying no to things, rather than in the other. departments proposing things. And that, I think, is a structural problem. And there is still a cachet in being a Treasury civil servant. And and it is kind of true, and I don't I mean, I suppose it is still true. And other departments might question this, whether the brightest, you know. graduates in the fast stream go into the Treasury.
But insofar as that is still possible, or even if they're not the brightest, but they're just very bright, it always frustrated me that they all they did with the policy was to say yay or nay. And I think that's a that's a structural problem because in the end, good policy making is. innovative and. creative and has to find ways of overcoming problems, satisfying different stakeholders and so on. And I would like to see the brightest civil servants trying to do those, those things. But there's another way in which this is generally true, which is if you have even three year spending.
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Speaker 5
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Speaker 5
In social policy and various other areas as well. Do you want to respond? If I could just add, I mean, I think, you know, there are some things that have improved. We have multi-year spending rounds where which was an initiative under Gordon Brown, whereas previously we had. essentially one year spending round. So that gives a bit more certainty. This government has. extended the period for capital to five years, which is better than three years.
The government has recently reduced the discount rate, which actually will. benefit projects with longer .
The government has recently reduced the discount rate, which actually will. benefit projects with longer .
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Speaker 5
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Speaker 5
To a slightly delayed given that the Stern Review proposed this in 2006. Yeah, but the Treasury never regarded the Stern Review particularly as being relevant to it as opposed to the rest of the world, which I think is an issue with Stern Review, or at least Treasury official told me that at the time that stern was for foreigners, when I suggested it might be influencing the next budget. That was when I was at Defra rather than at at the Treasury. So I don't think it's the challenge function. I do think that, as Michael said, though, there are.
We've written extensively the Institute for government about the oddities of the budget. process and a report we put out in. 2017 called Better Budgets. I mean, it is a very weird and very different from normal policy , policy making processes. And one of the big frustrations, if you're in a department like Defra, is that you will find sort of. policies in your area being developed by the. Treasury without reference to what you're already doing. And then because the Treasury can almost sort of pass you in the fast lane through the budget process, you will. discover your.
painstaking work with stakeholders to build some consensus on something which you think is your policy area has been. overtaken by the Treasury either trying to do its own scheme in a similar area so that the Chancellor can announce it, rather than your Secretary of State, or that you discover that some initiative you've been working on has been cut off by a. commitment that the Treasury has made. You know, I remember we were working up something at great length on corporate.
We've written extensively the Institute for government about the oddities of the budget. process and a report we put out in. 2017 called Better Budgets. I mean, it is a very weird and very different from normal policy , policy making processes. And one of the big frustrations, if you're in a department like Defra, is that you will find sort of. policies in your area being developed by the. Treasury without reference to what you're already doing. And then because the Treasury can almost sort of pass you in the fast lane through the budget process, you will. discover your.
painstaking work with stakeholders to build some consensus on something which you think is your policy area has been. overtaken by the Treasury either trying to do its own scheme in a similar area so that the Chancellor can announce it, rather than your Secretary of State, or that you discover that some initiative you've been working on has been cut off by a. commitment that the Treasury has made. You know, I remember we were working up something at great length on corporate.
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Speaker 5
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Speaker 5
Which we'd done quite a lot of work on, only to discover that a very senior Treasury official had persuaded the. Chancellor that this should be dropped as part of a deregulation initiative after a lunch with the CBI. So. So the Treasury can throw its weight. around and you can very often in another.
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Speaker 5
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Speaker 5
Feel very much at the receiving end. And I think what you don't get enough of is in my time, I think it's probably improved to an extent now is genuine. co-production of policies in these areas between the Treasury and the relevant department. particularly if it's something which is going to be in the budget because the.
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Speaker 5
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Speaker 5
You know, we saw stories this year that John Healey was. imposing more silo ization within the Treasury itself, more compartmentalization. The Treasury is incredibly protective of. anything that the Chancellor is going to announce in a budget. And you only ever, as a Treasury Department, get to see a little slice of that if you get that, and maybe when it's already in the. documentation and too late to say, actually, we think there might be a slightly better way of doing that. So I think that's a bit frustrating, but I don't think it's the challenge function per se .
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Barry Gardiner
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Barry Gardiner
Think the problems lie elsewhere. Thank you very much. Barry Gardiner. Thank you. Chair. We often say that prevention is better than cure, but the New Economics Foundation argues that the five year spending review test to comply with the fiscal rules actually works against investment that would avoid longer term damage both to the environment and, of course, ultimately, to the economy. How how should ministers .
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Speaker 6
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Speaker 6
Tackle that problem? Let me answer this one first, if I may. So there's a very. specific technical. reason why things that might prove valuable after more than five years are not properly assessed. There are actually quite a number of reasons, but I want to just focus on one, because I've just literally just written about this in a piece in the New Statesman, which is the OBR has an economic model which literally assumes away any multipliers effect any multiplier or long term effect beyond five years. So there are none in the way the OBR. models the economic effects of policy.
Which is a problem on the growth side, less on the social and economic benefit side because the OBR doesn't measure those things. So on the purely growth effects, if, for.
Which is a problem on the growth side, less on the social and economic benefit side because the OBR doesn't measure those things. So on the purely growth effects, if, for.
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Speaker 6
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Speaker 6
You have an investment which is mainly going to pay off in in genuinely in financial or growth terms after more than five years or is going to in generating more growth or is going to save you money and have a, have a growth impact that way or fiscal impact after more than five years, it doesn't count, basically, which definitely militates against doing it because obviously on the fiscal rules side and in compliance with the fiscal rules, the way the OBR is going to judge your policy is really important. And the OBR scores every policy. So as well as the Treasury's fiscal scoring, the the OBR has to do a kind of growth.
scoring of policies. And it's. It is. So firstly, it assumes the way. I mean, it literally doesn't take anything beyond five years. But even within the five years, it is a rather. skeptical body about what what I mean, technically it's multiplier effects are smaller than many other people's estimates. It, it, it has a very strong crowding out hypothesis. So public investment tends to crowd out private private investment. It assumes that the economy is nearly at full employment. The output gap is small. So there's a very technical thing about the OBR model in all of this, which I think is .
scoring of policies. And it's. It is. So firstly, it assumes the way. I mean, it literally doesn't take anything beyond five years. But even within the five years, it is a rather. skeptical body about what what I mean, technically it's multiplier effects are smaller than many other people's estimates. It, it, it has a very strong crowding out hypothesis. So public investment tends to crowd out private private investment. It assumes that the economy is nearly at full employment. The output gap is small. So there's a very technical thing about the OBR model in all of this, which I think is .
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