CO2 strategy in tatters after VAT retreat

The Government's defeat over the introduction of the second stage of VAT on domestic fuel and power has demolished a central plank of its strategy to curb carbon dioxide emissions. Growing doubts are hanging over other key measures in the strategy - and the Government is now under pressure to clarify its intentions before the first conference of parties to the 1992 UN Convention on Climate Change opens in March.

The latest official projections suggest that the UK's annual CO2 emissions will rise from 158 to 168 million tonnes (expressed as carbon) between 1990 and 2000 unless steps are taken to curb the trend. In January 1994, the Government unveiled its strategy to deliver annual savings of 10 million tonnes and meet the Convention's requirement to return emissions to the 1990 level by 2000 (ENDS Report 228, pp 21-24 ).

The controversial decision to introduce VAT on domestic fuel and power was expected to contribute 1.5 million tonnes towards the total. VAT was introduced at 8% last November, and was due to be increased to the full rate of 17.5% in this year's Budget. However, on 6 December the Government was forced to abandon the second stage after concern over the impact on low-income households led to a humiliating defeat in the House of Commons.

It is now debatable whether the existing 8% rate of VAT will lead to any significant reduction in domestic CO2 emissions. The opposition parties, environmentalists and welfare groups have argued from the outset that the VAT instrument was a blunt and inefficient means of reducing domestic energy use.

Falling energy prices
The impact of the 8% VAT increase has already been largely absorbed by falling energy prices (ENDS Report 232, pp 20-23 ). According to Michael Heseltine, President of the Board of Trade, in real terms - and including VAT - gas prices have fallen by 1.1% and electricity by 1.3% in the past two years. Over the past ten years, the real-term prices have fallen by 20% and 4%, respectively.1The Association for the Conservation of Energy (ACE) is now calling for VAT on energy-saving devices to be reduced to 8% as "a VAT solution to a VAT problem". One of the Government's justifications for imposing VAT on fuel was to reduce anomalies between energy supply and demand measures.

Meanwhile, the effectiveness of other elements in the CO2 strategy is increasingly in doubt.

  • Road fuel duty: In his Budget statement in November, the Chancellor raised duty on petrol by 2.5p per litre, meeting last year's promise that the rate of duty would be raised "on average" by at least 5% per year in real terms. Diesel duty was increased by 3p per litre (ENDS Report 238, pp 3-4 ).

    In December, however, to help plug the £1.5 billion shortfall in revenue left by the VAT defeat, Mr Clarke added a further 1p to duty on both diesel and petrol. This would, he said, "play a part" in reducing emissions in line with the 2000 target - though he noted that "petrol will still be cheaper in real terms than a decade ago and cheaper than in our main European competitors".

    The CO2 strategy reckoned that with a 5% duty increase in each Budget to 1999, emissions would be 2.5 million tonnes lower than in the base case. On its own, the 7% increase in duty this year seems unlikely to bring much in the way of further savings. Indeed, the Chancellor is quite at liberty to introduce lower duty increases in future years - perhaps in a pre-election budget - and still meet the commitment to a 5% average increase.

    The Royal Commission on Environmental Pollution, in its recent report on transport and the environment, called for fuel duty to be increased by 9% per year until 2005 (ENDS Report 237, pp 14-18 ). Crucially, it believed that a 5% increase would bring CO2 savings of only 1.4 million tonnes by 2000 - over 1 million tonnes short of the Government's expectations.

  • Energy Saving Trust: A major contributor to the CO2 strategy was expected to be the EST's work in overseeing financial incentives, loan options and customer advice on energy efficiency measures. Savings of 2.5 million tonnes were expected by 2000 - but to achieve these the EST needed to oversee a dramatic increase its annual investments to £400 million in 1998.

    However, Clare Spottiswoode, Director General of gas regulator Ofgas, blocked British Gas's funding for the EST, claiming that she had no authority to authorise the imposition of a levy on gas bills (ENDS Report 234, pp 11-12 ). In July, British Gas submitted a greatly scaled down package of EST projects to Ofgas for approval - but almost six months later neither the EST nor the Department of the Environment (DoE) ha received any response.

    Electricity regulator Offer has allowed the electricity companies to provide some funding for energy efficiency projects, but at a level way below that needed to meet the EST's targets (ENDS Report 235, p 11 ).

    The EST's hopes are now pinned on the Gas Bill, due to be published in February. In December, the House of Commons Trade and Industry Committee called for provision to be made in the Bill for the Government to impose an energy efficiency levy on gas consumers.2The EST is pushing the DoE to provide funds in the short term. Savings won by the Trust's activities would be cumulative, so continued delay in resolving its funding crisis will make it increasingly difficult to come close to the emissions reduction target. The EST has not yet put a figure on the potential shortfall.

  • Combined heat and power: The CHP Association has issued a stern warning that the expected one million tonnes reduction in CO2 emissions by 2000 from the Government's increased target for installed CHP capacity is under threat from adverse market conditions (see box ).

  • Other measures: Remaining CO2 savings were to be achieved by a diverse range of measures - many of which have got off to an inauspicious start. An energy-saving drive in the public sector was intended to reduce CO2 emissions by another one million tonnes by 2000, but consumption actually increased over the first three years of the scheme.

    The "Making a Corporate Commitment" campaign, aimed at securing voluntary energy savings in industry, has also made halting progress (ENDS Report 234, pp 12-13 ). And the Government has watered down expected savings from small businesses under the Energy Efficiency Office's Energy Management Assistance Scheme (ENDS Report 232, pp 20-23 ).

    A crumb of comfort
    The DoE is drawing some solace from the Budget's increased funding for the Home Energy Efficiency Scheme (HEES), up from £70 million to £100 million per year. A spokesman said HEES could bring savings of 700,000 tonnes of carbon by 2000 if the increased funding continued beyond the promised three years. However, HEES is primarily a social welfare programme aimed at improving comfort for low income groups - and it did not feature at all in the Government's original CO2 strategy. An EST spokesman described CO2 savings from HEES as "a drop in the ocean".

    The Government is now under pressure to issue a revised CO2 strategy before the Prime Minister attends the first meeting of parties to the UN Convention in Berlin in March. On 12 December, Environment Minister Robert Atkins said that the Government is committed to meeting its obligations under the Convention, and is "considering whether further measures are needed to ensure that we remain on course."

    The scale of any further measures will depend critically on the outcome of the Department of Trade and Industry's review of the energy and emissions projections which underpin the strategy.

    So far, the depth of the economic recession and unexpectedly high output from nuclear power stations has helped CO2 emissions to drop further than expected. Indeed, in 1993 - the latest year for which figures are available - emissions were six million tonnes lower than in 1990.

    Future emissions increase
    However, there is little scope for complacency. In all the DTI's original scenarios, emissions were projected to rise steeply in the second half of the 1990s. Furthermore, many of the key original assumptions still appear fairly robust, including the choice of a "central growth, low energy prices" scenario as the basis for the CO2 strategy. The economy is emerging from recession, the Treasury recently forecast healthy economic growth for the next five years, and energy prices seem destined to stay low.

    The DoE hopes that more gas-fired power stations than expected will come on stream, helping to meet the CO2 target. However, the DTI's original assumption of 10GW of gas-fired capacity in 2000 is close to the National Grid's recent estimate of 12GW.

    Similarly, continuing market penetration by diesel cars is likely to make only a small dent in CO2 emissions - despite the "green" claims made for the fuel on these grounds (see pp 3-4 ). A more substantial reduction in projected emissions may be made if the Department of Transport revises its 1989 projections of traffic growth, now widely viewed as being rather on the high side.

    Looking for a quick fix?
    One of the greatest temptations facing the Government will be to seek a quick fix by further extending the operating life of the ageing Magnox nuclear reactors. Many of these may be allowed to continue to around 2000 if safety concerns can be satisfied - but the nuclear safety net will run out early next century, and there is currently little prospect of further nuclear stations getting the go-ahead.

    International pressure is building for further CO2 cuts early next century, when the UK's emissions are expected to rise steeply. The fear will be that failure to grapple quickly with underlying structural trends in the economy will make any future cuts far more painful.

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