DECC ponders future of CCAs

The future of climate change agreements for energy-intensive industrial sectors is once again under review.

The government is putting forward a range of early ideas for major reform of its carbon-cutting climate change agreements (CCAs).1 Under some options, the agreements would be scrapped.

The voluntary CCA schemes, covering 52 industrial sectors, give 80% relief from the Climate Change Levy (CCL) to energy-intensive industries, which are often affected by foreign competition. In return they have to meet agreed relative or absolute energy efficiency improvement targets.

The energy and climate department (DECC) estimates that the CCAs are collectively saving 10.5 million tonnes CO2e annually (ENDS Report 411, pp 47-48). They are popular with industry. But from April 2011, the relief will fall to 65%.

There have been previous consultations on the role of CCAs and their overlap with newer climate policy instruments, including the EU emissions trading scheme (EU ETS), and Carbon Reduction Commitment (CRC) energy efficiency scheme (ENDS Report 420, p 43). As with the current proposals, these were also aimed at simplifying the climate policy landscape.

While the final consultation did not achieve this more grandiose aim, it resulted in proposals from DECC for new kinds of simplified CCA agreements that were well-received by industry (ENDS Report 423, pp 50-51). But these were put on hold once the coalition government took office.

DECC announced its latest intention to review CCAs in its annual energy statement (ENDS Report 427, pp 45-46). Now it has made proposals to reform the CCL and to bring in a carbon floor price for fossil-fuel power generators (ENDS Report 431, p 5). This floor price proposal would leave existing CCL rates on downstream energy users in place, including those on electricity use. So CCL relief schemes, such as the CCAs, could still be required for energy-intensive industries.

But the future of CCAs is far from settled, with no reference to them in the floor price consultation document. This has prompted concerns that continued policy delay could mean a gap between existing agreements, ending in March 2013, and any replacement ones. That could undermine industry progress and stall investment.

DECC’s latest plans for CCAs will not emerge until a consultation paper is released during 2011. But four high-level options were discussed at a closed plenary of sector associations and others in London on 13 December 2010. Details of the options and industry responses in the stakeholder workshops were released in January.

The first two policy options involved closing CCA agreements. Option 1 proposed all sectors pay the levy in full, but there would be competitive tendering for  levy discounts or for grants for energy-intensive industries vulnerable to fo­reign competition. These could be based on the most cost-effective ways of cutting carbon.

Both variants were unwelcome, raising concerns over the extra cost and uncertain outcome of tendering compared to the well-understood CCA approach. Stakeholders also pointed out that while smaller firms could effectively participate in current sectoral CCA schemes, competitive tendering would tend to favour big firms with the most resources.

Option 2 was a mix of measures described as simplifying the policy landscape. It aimed to remove CCAs as a policy instrument altogether. Instead, vulnerable energy-intensive industries also covered by the CRC would be exempt from buying CRC allowances, the revenue from which is no longer recycled. But as in option 1, all sectors would pay the levy, raising competitiveness concerns, and would still have to report emissions. A second variant of this proposal also allowed for CCL exemption, which DECC considered “should avoid the most significant negative economic impacts” on vulnerable firms.

But industry groups saw option 2 as being in danger of conflating the different challenges faced by firms covered by CRC with those faced by more energy-intensive industries, with only limited overlap. As with option 1, there was concern there would be no targets and the outcome would be uncertain, potentially discouraging investment. It was seen as a non-starter.

Option 3 preserved much of current CCA schemes, but extended coverage to more sectors. It kept CCL relief, the need to negotiate clear targets and link rewards to achievement, and a role for smaller firms. Consequently, it was judged more likely to boost incentive to invest. It also raised criticisms previously ascribed to CCA schemes – how to deal with sectoral failure to meet targets and ‘free riders’, lack of  comparability of effort between schemes with different criteria, and difficulty of agreeing a target with DECC within a diverse sector.

One suggestion is that the schemes could be lighter touch than current CCAs, based on minimum levels of achievement, the rest being voluntary. But this risks a lack of a clear outcome. Stakeholders say sector agreements would need to be enforced by DECC.

The final option involved carrying forward existing CCA schemes, subject to widely accepted reforms and simplifications already proposed by DECC in March 2010. This was the most favoured option, not least as it was well-understood and addressed many earlier criticisms of CCAs. Though imperfect, most concerns raised with option 3 have already been addressed in proposed new-style CCA agreements. DECC is also considering charging for regulating CCA schemes to recover costs.

Even so, the schemes are complex, and continual percentage cuts are progressively harder to achieve due to diminishing returns on investment. There were also criticisms of the proposal to limit CCAs to firms at risk from foreign competition.

Dr Ray Gluckman, director of climate at consultancy Enviros, deals with 15 CCAs. “It would be an awful shame to see a highly successful process like CCAs done away with,” he said. He stresses the benefits of the sectoral approach with clearly defined targets and sharing of data through trade associations. But he said targets should be absolute, not relative, in line with the EU ETS and CRC.

He accepted that having too many policy mechanisms is undesireable, but said experience shows measures such as taxation are an inadequate incentive compared to a clear framework with targets, whether for CCAs or the CRC.

Gareth Stace, chair of the Manufacturers’ Climate Change Group, told ENDS industry welcomed discussions, and noted the possibility of including the full supply chain in option 3. But industry still favours CCAs and their current scope. “We were very happy with the outcome of the previous consultations,” he said. The group is meanwhile concerned to ensure no break in CCL relief after March 2013, and is seeking clarification on the review timetable.