Oral evidence: Sustainability and HM Treasury, HC 181
Thursday 15 September 2016
Ordered by the House of Commons to be published on 15 September 2016
Watch the meeting
Members present: Mary Creagh (Chair); Peter Aldous; Caroline Ansell; Zac Goldsmith; Margaret Greenwood; Peter Heaton-Jones; Mr Peter Lilley; Kerry McCarthy, Dr Alan Whitehead.
Questions 100 - 190
Witnesses
I: Jane Ellison MP, Financial Secretary to the Treasury, Susan Acland-Hood, Director, Enterprise and Growth Unit, and Neil Kenward, Deputy Director, Energy, Environment and Agriculture, HM Treasury.
Written evidence from witnesses:
Jane Ellison MP, Susan Acland-Hood and Neil Kenward.
Q100 Chair: It is our pleasure here today to welcome Jane Ellison, Financial Secretary at the Treasury; Susan Acland-Hood, Director, Enterprise and Growth Unit; and Neil Kenward, Deputy Director, Energy, Environment and Agriculture. Thank you particularly, Minister, for making time in your diary. We were anxious not to let this session slide until October because we heard a lot of our evidence in June and July, so we were worried about losing some of the memories that we had of the witnesses who appeared before us. The ones who did appear before us were in general uniformly critical particularly of the Treasury’s approach to last year’s autumn statement and the cumulative impact of a series of decisions that were taken in that statement.
As the Department in charge of fiscal and economic policy, do you agree that the Treasury has a responsibility to ensure that its decision-making does not harm the environment?
Jane Ellison: The short answer to that is yes, but I wonder if perhaps for you, Chair, and the Committee it is worth a quick little bit of context from my point of view. I am slightly concerned that I may not be in the best position to give you the fullest possible answers and that is why I have two officials with me in particular, because obviously the new Government was formed in mid-July and I joined the Treasury in mid-July, so I have not been present for the run-up to a spending review. We are now of course in the foothills of preparing for the autumn statement, but I have not been there up to a major fiscal event, so I can only speak to some extent from almost the other side of the fence in terms of Treasury’s preparations for the Spending Review as a spending Minister.
It might also be useful for the Committee to know that with the machinery of government changes in July around creating new departments, the Treasury has lost a Minister—there is no Exchequer Secretary—and therefore I have some of the environmental and Defra-type areas. Energy and environment policy has come to me from what was previously the Exchequer Secretary’s, in addition to the Financial Secretary’s duties, so it is a new portfolio for me and one that I am obviously spending time to get my head around.
Q101 Chair: We did ask for David Gauke, the Chief Secretary, because he obviously has the historic memory of what the Department has done over the last year, but the powers that be decided that it was you. But obviously we are coming up to a fiscal event and as a Committee what we have realised through the course of this inquiry is just how important your Department is in terms of meeting carbon budgets, decision-making around very big investment decisions—we have one on the floor of the House later on today with Hinkley Point—that do or do not meet our criteria, whether it is on waste and recycling, whether it is on low-carbon homes, carbon-efficient homes or whether it is on carbon capture and storage. In all three of the those areas we had massive criticisms from the private sector about the fact that they had huge sunk costs negotiated in good faith—in some cases in a period of many years, particularly on the energy-efficient homes—ready to roll and then suddenly the Chancellor stands up one November afternoon and all of that work, without any knowledge or prior warning, suddenly the rug is pulled out from them and the investment, those sunk costs that house builders or different providers had made are suddenly lost and there is essentially a policy vacuum.
It is always clouded in the narrative of reducing costs on businesses, when in fact good businesses want to do the right thing for the environment, want to have energy-efficient homes, want to engage on carbon capture and storage and have worked in good faith with the Government. Do you think it has damaged the Treasury’s standing with the private sector? The evidence we have is telling us that it has damaged Treasury’s relationship with business and that it is also rocking investor confidence.
Jane Ellison: It is obviously concerning to hear that you have had witnesses saying that. It goes without saying that I will read the Committee’s final report with great interest and that will inform my thinking as we go forward. I would be disappointed that they feel like that.
It is clear to me that the Treasury is trying to do a number of things. First of all, it does take sustainability very seriously. We all recognise, Treasury no less, that sustainable economic growth is absolutely key. Ultimately we are committed as a Government, and Treasury is committed as a Department, to the Government’s carbon targets and all of those things and indeed has a good record, I would say, to date. I take your criticism, but that is set against a backdrop of considerable achievements in these areas, particularly since 2010. Treasury does have some mechanisms through things like the “Green Book” and through its engagement with other stakeholders to make sure that value around sustainability is put alongside all the value for money arguments.
But I guess fundamentally there is always that tension in policy-making between trying to make sure that one is looking at the best value for money across Government. I know as a spending Minister before that the Treasury would basically come and kick the tyres of your spending plans to make sure that you had properly thought it through. I guess the Treasury is also in a position to take a view across Government Departments to look at how things work together. I go back to the point that obviously I was not here in the Treasury at the time, in the run-up to the Spending Review, and it might be useful perhaps to ask Susan, who was, to just say a few words. I am sure Treasury officials would be disappointed to hear that there have been those negative witness statements to you.
Q102 Chair: Before we move on to officials, a general strategic question: how are you personally as the Minister in charge of this—and the next autumn statement is approaching in a matter of weeks—going to reconcile that tension that is at the heart of Treasury decision-making, which is the need to make short-term savings to annual budgets, or multi-annual budgets in some cases, while addressing the environmental challenges of tomorrow? We found in our transport inquiry that there is no confidence that we are going to meet our electric vehicle targets in 2020, let alone in 2030, so that is the first issue. We heard that carbon capture and storage needs to be part of our energy mix, but that it is now going to cost £30 billion more potentially to invest in carbon capture and storage, so a short-term decision on cancellation is potentially going to cost the country tens of billions of pounds more in the longer term. What do you think are your biggest challenges coming up to the autumn statement? What are you most anxious about in terms of the sustainability piece?
Jane Ellison: First of all, it is worth noting that in this autumn statement we approach future policy-making, I would still contend, from a position of strength in terms of what is happening. Look, for example, at the annual support for renewables, which is likely to double this Parliament to over £10 billion in 2020-21. But more generally in terms of sustainability, I think the Chancellor has been very clear, particularly in the light of the decision the country took to leave the EU, that more than ever we understand that people need to have some sense of the direction of travel and in those areas where we can give certainty for us to do so. It is not possible, as you know, to give certainty on all those things because we have a period of complex negotiation ahead, but if you look at the assurances the Chancellor has given, I think it was in August, around maintaining some of the funding that was going to come through EU sources even beyond our leaving the EU, we are trying to give, where we can, that certainty and that sort of sustainability to policy in areas where it is possible to do so.
Q103 Chair: In the Chancellor’s statement, he has guaranteed CAP Pillar 1, which is the bit that is the subsidies to farmers’ incomes. What he has not guaranteed beyond the autumn statement is Pillar 2, which is all the public goods, the wildlife protection, flood prevention and the protection of the uplands. He has not guaranteed the European Regional Development Fund, some of those structural investment funds. Don’t you think it was a little bit smoke and mirrors to make an announcement, to keep trying to give reassurances—as you have just done—but when we met last week to look at this issue, we heard that these statements are only for projects that are going to be signed off by Treasury before the autumn statement? So it is not a long-term promise, is it, for potentially multi-billions of Regional Development Fund for this country?
Jane Ellison: The guarantees that were already given are about providing certainty in the short term, but the projects that they themselves guarantee, many of them are quite long-term projects. I think it was well-received by many people in the sectors affected. Details of contracts signed after the autumn statement are being worked on and will follow shortly, but obviously leaving the EU means we can take our own decisions about how some policy objectives that were previously targeted by EU funding will work. In a way, that is in the mix of that complex piece of work that has begun across Whitehall to look at both the challenges and opportunities of leaving the EU. I am conscious of the point you make, but I think it worth noting that it was well-received, to give those guarantees on those projects and that we are working on where we can give guarantees on things that are signed after the autumn statement.
Q104 Chair: On what I think is our third carbon budget, the 2023-27 budget, we have heard there is a gap of around 7% and that we are not going to meet it. What actions or advice have you had around that to help close that gap? It is just six years away.
Jane Ellison: Indeed. It is worth making the point that carbon budgets are met through a range of policy mechanisms. It is not just through what is allocated at a spending review. I know the National Audit Office, for example, made the point that some of the regulatory changes that affect quality standards—for example, domestic boilers, things like that—can make a very significant contribution to meeting that. It is not just through the Spending Review that one does that. We are making good progress at the moment. I am aware of the critique you have just laid out and we do intend to set out our plan for how we achieve the fourth carbon budget during this Parliament.
Q105 Chair: But that will be three years before the budget starts, so we could hear that in 2020. Do you think that is a long enough timeframe?
Jane Ellison: We are working towards being able to set out our plan. I cannot give you a timescale at the moment, but clearly you make an extremely fair point, that it would not be credible to do it right at the back end of that period.
Q106 Chair: Perhaps we could hear from officials on some of these issues, particularly around the energy-efficient homes and the cancellation of carbon capture and storage.
Susan Acland-Hood: Starting with zero carbon homes, the context to set this in is that it was a challenging spending review in which we had to make a range of quite difficult decisions and through that process we spent a lot of time making sure we were thinking hard about the environmental impact of the decisions we took. We asked departments to make sure they were doing that as part of the bids they put in.
The Chancellor thought carefully about zero carbon homes, noting two important points: first, that the zero carbon homes policy was likely to add around £3,600 on average to the cost of building a house, and secondly, that a large chunk of that was taken up with the Allowable Solutions element, which did not incentivise better energy efficiency; it was effectively just a tax on development. He was concerned that the point we were at in terms of where we are in needing housing supply to pick up in the country, it was not the right way of going about the aim that it had set and also that it came too rapidly on the back of some very significant changes that had been made in the requirements for energy efficiency of new build homes over the preceding period. We increased by around 30% the requirements for energy efficiency on homes immediately before that. It was not an easy decision to take—we gave him a lot of advice in order to support him in taking that decision—but that was the choice he made.
Q107 Chair: Did you give him the costs of the lifetime savings in energy efficiency over the house? It seems like you are removing what you said was a so-called tax on house builders, but then by having less energy-efficient homes you are adding to the energy bills of the house buyers, aren’t you?
Susan Acland-Hood: We did look at that, but as I say, the Allowable Solutions element, which makes up a large chunk of the zero carbon homes policy as it was constituted, did not increase the energy efficiency of homes. A large chunk of the spend did not make that compensating saving from later household bills.
Q108 Zac Goldsmith: A technical question: I believe the last Mayor of London won the right to maintain the zero carbon homes obligations on developments in London. I do not know whether there has been a time lapse or whether that was an immediate decision following the Government’s decision to scale back from those commitments. You are nodding your head, but if I am right, has there been any assessment as to whether or not by maintaining those requirements in London that has added costs, depressed development or had any adverse impact at all from an economic point of view?
Susan Acland-Hood: I am afraid I don’t know the answer to that question. We will have to write to you.
Q109 Chair: That would be helpful, if you could write.
Mr Kenward, can you talk to us about the CCS cancellation, over £100 million in sunk costs? Is the Treasury now reimbursing the companies involved in that or is there any legal action underway from them to recover their costs?
Neil Kenward: Thank you for the question. The NAO set out quite clearly in their report the reasons that the Chancellor, with other Ministers, took the decision to cancel the CCS competition. As the Minister has already said, it was a very tight spending review so there was a lot of scrutiny on all the bids for capital spend and this was a significant one; £1 billion was the bid amount. The costs involved were not just that fiscal cost. The projects, when up and running, would have added potentially many billions of pounds to consumer bills over the lifetime of the contracts.
Q110 Chair: Just like Hinkley Point will.
Neil Kenward: They are at a much higher cost per megawatt hour than Hinkley Point.
Q111 Chair: What were the costs per megawatt hour?
Neil Kenward: We do not know for sure what they would have been, because the bids had not been received at the time the decision was taken, but we believe they were likely to be in the range of £150 to £170, which is obviously very high.
Q112 Chair: What is the subsidy cost for renewables per megawatt hour, if you were looking at the subsidies?
Neil Kenward: It varies quite dramatically between different types of renewables, many of which are on a downward cost curve. Offshore wind is a very good example, where the costs have been high through this development phase, but have fallen over time or we hope they will fall over time.
Q113 Chair: Are they not over £100 per megawatt hour?
Neil Kenward: The latest auction for offshore wind did have a price of over £100 per megawatt hour, but the Government set a target that the industry should try to meet of £85 per megawatt hour by the mid-2020s.
Q114 Chair: That is much more mature, isn’t it? Obviously with a novel industry like CCS, where you do not have proven technologies, you would expect it to be higher because you are underwriting their risk.
Neil Kenward: There is an element of that. Of course, one of the key challenges for the Government is how many of these novel technologies can it support at any given time and how much burden can we put on the bills of households and businesses. There is a competitiveness issue for businesses and for households this is a regressive burden, because poorer households have a larger percentage of their spending going on energy bills. A lot of these factors were being taken into account and this is at a time when a lot of the other renewables had been exceeding the deployment expectations, so the costs of the schemes were escalating quite dramatically at the point these decisions were being taken.
Chair: Thank you very much. We are going to move on now to the waste sector with my colleague, Peter Aldous.
Q115 Peter Aldous: I was just going to look at a variety of sectors in terms of Treasury supporting private sector investments and recent claims that some of your decisions have harmed investor confidence, are not providing long-term certainty and some people might say policy flip-flopping has not been helpful in acting as a catalyst for private sector investment. How can the Treasury support private sector investments in sectors that promote environmental sustainability, for instance, in low carbon or the waste and recycling sectors?
Jane Ellison: Let me say a word about that. Clearly environmental taxes are one of the areas in which we have clear mechanisms and we continue to use those. In terms of setting overall targets, we have ambitious targets that we continue to work to. Our perception would not be that there is that degree of lack of confidence, but if that is something that is of concern, then we would want to try, where we can, to give a degree of certainty. It is always a bit of a balancing act, but we have seen very successful environmental taxes deployed in areas like landfill over the years with good consistency. Equally, we have also seen recycling greatly incentivised, but again, it might be useful if, Susan, you want to add to that.
Susan Acland-Hood: Is there anything in particular you want me to address?
Peter Aldous: Just in general. I will come on to the details.
Susan Acland-Hood: The Minister is absolutely right, we think about this through the prism of environmental tax. There are also a range of other methods we use. We have invested about £3 billion, as you know, between 1997 and, looking out, 2042 in grant funding to PFI, local authority waste infrastructure projects, for example. We know that there is investor appetite for that type of thing.
Q116 Chair: On PFI waste contracts, a whole raft of PFI contracts was cancelled in 2010-11. Have you made any assessment on what impact they have made? The recycling rates dipped for the first time in about 15 years last year. Last year they dipped down below 45% and there is now a question mark over whether we are going to meet those 50% recycling rates at a time when Wales and Scotland are pulling ahead, up at 59%.
Susan Acland-Hood: Yes. Because we had made such significant investment before that, we were by 2010 able to have quite a high degree of certainty that we would meet our landfill diversion targets and that was the context in which those projects were cancelled. But I accept the point you make about the dip in recycling rates and that is something we are looking at carefully.
Jane Ellison: We are working closely with local authorities on that. There is clearly more to come and there is great public appetite for it as well, so it is something we would want to make progress on.
Chair: We will come back to that in more detail.
Q117 Peter Aldous: A number of witnesses have highlighted to us that the totality of recent Treasury decisions in climate and energy policy has had a significant cumulative impact on investor confidence. The sort of examples that have been put to us are the frequent changes in the rules to the subsidy regime for renewables; the abolition of the rules for zero carbon homes; the end of the climate change levy exemption for renewable energy generators; the freezing of the carbon floor price after only two years, and as we heard, the cancellation of the carbon capture and storage projects. Against the backlog of these examples, how are you seeking to instil investor confidence that they can make long-term investments without policy being changed at will? Some of these investments have a cycle of 20 or 30 years, but things can just change overnight. How are you trying to address that worry?
Jane Ellison: I think it is a fair point to make. It is easy to say all those things together and make it sound like there were lots of overnight decisions, but some of these decisions, in areas of uncertain technology where costs are uncertain, there is always inevitably going to be a certain amount of need to look at that policy, for example, if you discovered that you were trying to incentivise one industry and then costs suddenly massively escalated. Ultimately we as politicians and the Treasury are looking at the whole of spending across Government and we do have a responsibility and a duty to the taxpayer; we have a duty to sustainable Government finances more broadly. I do not think you can ever say that you would be in a position that you would never change your mind on something, because in areas of new technology in particular sometimes things change and you have to change to suit the circumstances. I would say that there is quite a consistent commitment on renewables in particular and we are making really good progress there. For example, we have given good consistent commitments on ultra-low emission vehicles, where again we have a very strong market in this country and I think we have sustained that.
There are areas where we do have very consistent commitment and we are moving in the right direction, but I am sure we would not want to hear that that was the overwhelming evidence that you were getting and it is obviously important to take that on board. As we go forward, that whole issue, where there are things that as a country we do face, inevitable uncertainty as we look to move out of our relationship with the EU to a different relationship with Europe and with the rest of the world, clearly those issues about investor certainty are probably in starker relief than ever before. That is certainly something we would want to reflect on and make sure we can respond to.
Q118 Peter Aldous: One of the things we have heard, Minister, coming from the witnesses who have come before us is that there is a feeling among investors, whether they are dealing with climate change issues or renewable investment with what was DECC, whether it is zero carbon homes with what was the DCLG and maybe other policies in Defra that, if you like, all investment decisions ultimately lead to the Treasury. There is a sense that, “We need not bother about the particular departments. We bypass them; let’s go to the Treasury”. Do you think that is something that has developed in recent years? Do you think it is a good thing?
Jane Ellison: It is hard for me to comment on that. Until July I was the Public Health Minister and therefore I would only be talking from the point of view of received wisdom if I was to talk about what the Treasury thought about those things before. My instinctive answer is no, I do not think that is right. I can understand why people who might have been affected negatively by decisions might instinctively say that, but I do not think it is right. What the Treasury is in a position to do is to look at how things right across Government work together and also it is probably in the best position of any department—indeed, it is its responsibility—to look at how different policies interact with each other and to ultimately make sure that we deliver sustainable growth within the budget envelope set down by politicians. We have to take responsibility here. Ultimately Government departments are working to an agenda that politicians give them and that often also reflects manifesto commitments.
If you look at the most recent machinery of Government changes, the move of energy to sit in the Business Department, to me instinctively that feels like a good thing to do and many people would agree. One of the things that you sometimes heard people talking in the past about is two departments where people might be developing policy in parallel; I think you now have those things coming together. Clearly the issue about high energy use in energy intensive industry and how we deal with that from the point of view of international competition etc., that was all very much a big theme of the last year or so and I think bringing those things together in the new BEIS Department is a good thing and perhaps—but this is purely speculation—it would give some assurance to the kind of commentators you have just mentioned, who felt there might have been a tension. Whether there was or not I do not know, but if it was perceived there was a tension, that might be one of the ways in which it is helpful going forward. But again, perhaps if I can ask Susan or Neil to comment.
Q119 Peter Aldous: That would be welcome, but before we lead on to them, Lord Deben appeared before us in July and he said, “The Treasury has to get itself in a position in which there is a single and clear view about all these things in which it is involved that will maintain the confidence of investors”. Leading on to Susan and Neil, what steps are being taken to address that particular concern?
Susan Acland-Hood: We do have a set of things on which there is a clear view, not just in Treasury but across Government. As Treasury officials we do not see ourselves as a separate empire. We do try to spend as much time as we can working with our colleagues across Government to look at evidence together and to take decisions collectively.
Briefly returning to your point about investor certainty and making sure there is a clear framework, we do have the framework that is set out by our 2050 targets, by a whole set of things that come through our domestic legislation through the carbon budgets, which give some very firm and fixed points. You may well turn to me in a moment and say that those targets look stretching, but in a sense that is the point of them. They have to be stretching or they will not work, they will not cause us to make the choices that we need to make and that means that they involve making hard decisions. But the fact that that framework is there does give significant investor certainty that there will continue to be effort from Government in this space.
The second thing that is worth saying is that the fundamental framework for the power sector of contracts for difference is inherently a mechanism that offers certainty to developers and investors around the price that will be paid for their power. I know that sounds a bit simple, but I think it is quite an important part of our framework and that is a part that we have not fiddled with or interfered with because it does offer those fundamental pegs in the ground.
What the Minister said is right though, that we will continue to work across Government and to support Ministers in trying to make sure we do have that clear framework, but I am not sure that we will ever get to a place where there will never be an occasion on which we want to look at something we have done in the past and reassess it and make sure it still makes sense. That means that sometimes there will be changes.
Q120 Peter Aldous: You talk about stretched targets. One of those stretched targets was the zero carbon homes policy. The quote we had, I think from Willmott Dixon, was that that was “scrapped overnight, to uproar” after six years of the industry building up. Now, that was a stretched target. What had changed overnight to suddenly scrap something that industry was set on a particular course to pursuing?
Susan Acland-Hood: I am not sure there is very much I can add to what I said a moment ago about the zero carbon homes target. It was part of the process of the Spending Review, through which we do stand back, look at the policies in place and the spending in place around them and also look at the economic impact. It was part of that decision-making process
Peter Aldous: Do you have anything to add, Mr Kenward?
Neil Kenward: Only to reinforce the point about trade-offs. For example, the levy control framework was welcomed very much by industry as setting a clear framework and stability, but inherent in that framework was the sense of a budget cap. A lot of the decisions that were taken reflected the fact that after the middle of last year, we became aware that the forecasts were that that cap would be breached and therefore the Government had to take steps.
Q121 Peter Aldous: I accept we live in a dynamic world; things are changing the whole time. You said you became aware in the middle of the year that there was this particular problem. From industry’s perception, it does appear at times that some of these policy reversals happen overnight. Do you feel the mechanisms are there in Government so that, if you like, you are getting a flashing amber light—if you like, “Houston, there is a problem”—as soon as there is a problem rather than acting late, in a hasty way?
Neil Kenward: Obviously we try to monitor things like the levy control framework. Forecasting is inherently difficult and uncertain, but we do what we can to spot those early warning signals and bring them to the attention of Ministers, as appropriate. Particularly the delivery departments, DECC, as was, and Defra, but also ourselves, we have quite constant dialogues with stakeholders in these areas. We do try to keep our finger on the pulse as much as possible.
Q122 Peter Aldous: Is how you monitor under review regularly?
Neil Kenward: I believe there is an NAO report on the levy control framework coming out soon and we look forward to reading the findings of that.
Q123 Kerry McCarthy: I do not want to take up too much time because I know we are still quite early on in the session, but just as an example, the car industry, because I think it is an example of where Treasury clearly had a key role in terms of being the driver of change towards diesel cars when reducing emissions was the key issue. It is also an important revenue stream in terms of how we tax motorists in this country. However, you then have Defra, which has very much the environmental end of the brief on air pollution. We saw during the Volkswagen scandal that a lot of that was left to the Department for Transport, so it was purely something about how the car industry functioned. I just wondered what role the Treasury would play in bringing all those different elements together. Obviously the BIS Department and DECC in the past would have a role too. To what extent is Treasury policy driven by just looking at your revenue streams from motoring, fuel taxes and so on? You have campaigns for things like car scrappage schemes, which are obviously a potential cost. To what extent is policy financially driven as opposed to environmentally driven?
Jane Ellison: Let me make a brief comment, but it will be brief because clearly I am just at the beginning of looking at some of these issues. It is clear to me that if you look at what drives environmental taxes, for example, they are for the most part programmed to deliver changes in behaviour and therefore they are mostly modelled to often diminish in terms of their return because we are assuming that behaviour change will follow. So that in itself goes to support the argument that they are not purely about revenue raising because otherwise you would design a tax that just kept going up probably. I am quite clear that they are one of the mechanisms by which we can look to change behaviour.
If you look at cars, I think we have a positive track record, particularly around, as I mentioned before, ultra-low emission vehicles where we are a huge part of the international market for that and a growing industry. Again, this is just something I am beginning to look at. From my constituency point of view, I know that my constituents are very interested in essentially sustainable growth and I have seen nothing in my time in the Treasury to suggest that that is not at the heart of Treasury policy-making too. But it goes back to the point I have already made, there are some intrinsic tensions and difficult dilemmas in all the environmental and energy policy that are just very, very difficult to work through. We see it in our postbags as MPs all the time, that people want sustainable growth, people want green and good things, people want low energy bills. Some of these things are very hard to bring together and that is the policy challenge.
Q124 Chair: Can I just ask a supplementary? Mr Kenward, you talked about the carbon capture and storage cancellation. The Committee on Climate Change has told us that CCS has to be part of our energy mix and the Prime Minister yesterday at PMQs said there is £130 million going into it. That is all research, but we have research coming out of our ears. The question is translating that research into actionable, profitable, Treasury underwritten energy. In the power sector, if we are ever going to have ultra-low emission vehicles, and we are missing our targets on that—I don’t know if you have read, Minister, our report on that, which says that the target of 9% is unlikely to be met by 2020, that there is a midpoint of between 3% and 7%—a midpoint of 5%—so we are only halfway to that 2020 target, just three years out, and that, on the 60% target by 2020, there is no map. We will only get those vehicles if we have a low carbon power sector and the cancellation of the CCS is going to add £30 billion to that bill. So you saved £1 billion in the autumn statement 2016, but the potential for spending more than needs to be spent over the next 10 to 15 years, we are now on that path. What analysis did you make as officials when you were advising the Chancellor?
Neil Kenward: CCS was always going to be a long-term policy. As the Minister already said, the Government did not decide that it was ending all future of CCS in this country and indeed, as the Prime Minister said yesterday, this is still an option that could be pursued.
Q125 Chair: It is only a research option; it is not actionable. It is not working and delivering power in the real world.
Neil Kenward: The Government has not yet decided the strategy for CCS and that is something that obviously will need to be done in the coming months and years.
Q126 Chair: When do you think we are going have a strategy for CCS?
Neil Kenward: I am afraid I do not know the answer to that.
Q127 Peter Aldous: Madam Chair, can I come in there? A declaration of interest: I was on Lord Oxburgh’s report on carbon capture and storage and we reported on Monday. From a personal perspective, I believe it is an excellent way forward and I do hope the Treasury, along with the rest of the Government, will be giving it full consideration.
Neil Kenward: I would just quite like to quote from Lord Oxburgh’s report where he does say, “The initial pilot competition had poor design and that led to the lack of true competition and the imposition of risk on the private sector that it cannot take at reasonable cost”. I believe Lord Deben, in a letter to the Secretary of State, Amber Rudd, when she was head of DECC, also noted failings in the competition. It was not necessarily the right approach, those pilot projects.
Q128 Chair: But you let it carry on with a poor design for seven years. That is the problem, isn’t it? If there was a poor design and people realised that, then at what point do you pull the plug? You pull the plug when people have spent tens of millions of pounds on it. You have been very clear with us this morning that it was a decision to save £1 billion. That was also very clear.
Neil Kenward: Also the costs to consumers that would have come from those projects. Those were just two pilot projects and much more cost would have occurred further down the pipeline.
Q129 Chair: So more than the £30 billion extra the Committee on Climate Change estimates it is going to cost over the period to 2050? That is what they are saying is extra.
Neil Kenward: I am not going to challenge what the Committee has said on that matter. These are inherently uncertain. These are very large numbers about the future and depend on a lot of assumptions, but the decision at the time was taken on the grounds—as I say, it has not ruled out the Government pursuing CCS in future.
Q130 Dr Alan Whitehead: I wonder if we could return briefly to the levy control framework conversation a moment ago. My particular concern about the levy control framework and Treasury is that this was a framework that was introduced, I think, in autumn 2011 at a time when there was a direct relationship, a fixed relationship, between rewards for renewable energy and the renewable obligation and what money was available. That changed during the course of the operation of the levy control framework to the CFD regime, which is a variable reward against strike price, against reference price.
Yet the levy control framework changed not a jot and indeed, as should have been no surprise, partly as a result of that variability the levy control framework now is no longer operable in terms of the ability of anyone to bring forward any serious investment in renewable energy, particularly onshore/offshore wind, up to 2020 because it is now effectively bust. There is no levy control framework announced after 2020 at the moment. How does that add to investor confidence when there is an instrument in the hands of Treasury, which the Treasury must have known would have to work in a different way when the nature of the renewables obligation changed, and yet Treasury has apparently stood by and allowed the whole thing to dry up and stop, with investors tearing their hair out at the fact they have no forward sight for investment in projects such as offshore wind? Indeed, there are arguments that the levy control framework itself has led to that cliff edge in investment confidence and certainty rather than led to a smooth passage of investment and renewables over the period.
Neil Kenward: First, I would just like to say that this is not a purely Treasury framework, a purely Treasury decision process. I know when these decisions were being taken the Prime Minister was out there advocating the decisions, the Secretary of State was. This was a cross-Government recognition that rising costs on bills were going to cause difficulties for households and businesses, so that framing is quite important.
I recognise of course what you are saying about the CFD introducing a different element of uncertainty into the forecast that is within the levy control framework, but the key drivers of overspend were the very rapid deployment, more rapid than expected, and issues like increased load factors for offshore wind and indeed onshore wind deployment. So there were genuine factors that risked the spending getting out of control. We have seen in countries like Germany where if fast action is not taken the costs and the burden on bills can escalate very quickly. I believe that their solar surge, if you like, is now landing customers with about €20 billion of costs per annum to support these solar subsidies. So there had to be steps taken and, as I say, it is hard to design the perfect framework for these things. There is such uncertainty, there is difficulty in managing these things. I do not think the perfect system can be conceived of, but what we were doing was trying to get that right combination of certainty, which drove that successful deployment, but then recognising that there is a trade-off with the costs on the economy.
Chair: We are going to move on. Did you want to add something?
Susan Acland-Hood: I was only going to say I do also think in terms of forward deployment it is important to note the auction announced at the budget for £730 million worth of offshore wind and other less established renewables. So there is a forward pipeline there.
Q131 Dr Alan Whitehead: Sort of, but there is no new levy control framework announced post-2020?
Susan Acland-Hood: No, and I think the points that you make about the importance of thinking about how the levy control framework operates in this way are exactly the points we are considering as we think about the levy control framework beyond 2020.
Q132 Zac Goldsmith: I am going to apologise in advance: I need to be at the topical questions. It will not be a reflection of your answers to me, but I will leave after asking a few questions.
First of all, Minister, the Government has clearly signalled an intention to put more emphasis on industrial strategy. I would be interested in knowing how that would be reconciled with the historic reluctance on the part of the Treasury to pick winners. How do you square that up?
Jane Ellison: It is slightly difficult for me to comment on the totality of it, but it is fair to say that the Prime Minister and others have been very clear that this is not any sort of return to the days of trying to pick winners. It is far more about trying to look holistically at what are the conditions we need to create and put in place in this country to deliver sustainable economic growth, so far more about looking, for example, at what our skill gaps are; to look to say if we are going to be successful and world-leading in international terms in a particular area that we have perhaps intrinsic strength in, what are the skill gaps in that area, where can we look to make sure that we are looking at education policy, we are looking at skills policy and so on. I think it is far more about that.
The Prime Minister made reference just after the Olympics to the lessons from what had happened there in terms of saying, “These are areas of intrinsic strength and we are going to look at every single thing that underpins that and make sure we support it”. But I think that is very different, back to what perhaps we both remember from the 1970s, from trying to pick winners in terms of individual companies. But there are clearly some sectors of our economy that do have some intrinsic strengths and we would perceive have the chance to be dominant in international terms. In parallel with that, we are also thinking about what our post-EU economy will look like and things like that. I think that is more what it is about, but that is just my response as a Government Minister, that is not something we have specifically sat down and discussed.
Q133 Zac Goldsmith: Understood. Can I ask you how that would work? Clearly it is all very cross-departmental. If there is a vision for an investor strategy, it is not just going to be the Treasury’s vision that is going to have a direct impact, it will be impacted by activities in all kinds of departments, not least the new BEIS. How do you envisage the Treasury working directly with that new Department to ensure that we have a single coherent industrial strategy that properly takes into account the issues we are talking about today of sustainability?
Jane Ellison: I will say a brief word and then perhaps hand over to Susan. It is quite obvious if that is going to work well then clearly we do need to be working right across Government, because by the nature of it, it is going to be a cross-cutting strategy. On my own experience, going back to the job I did for much of the last three years in Health, as a Minister I sat on what I know were often first time cross-cutting committees across Government in a number of different areas and I do think that we have come a long way in recent years in understanding the need to, from the very outset, work in a cross-departmental way. I sat in my previous job on probably around 10 cross-departmental ministerial working groups looking, from the outset, at how we deliver something that is important for economic growth, important to the public, but how we do that in a joined-up way rather than one department coming up with a perfect plan and then launching it at the last minute to other departments saying, “Any comments?” I think there is a recognition that that does not work so well and there is also a recognition, in some areas where we have had significant public policy successes, that if you look at something like the Troubled Families Initiative, the absolute essence of that initiative was getting a number of different departments around the table and basically stripping away the walls that sat between them to say, “How can we work together?”
Chair: We are trying to look at sustainability.
Jane Ellison: I know, but inevitably, Chairman, I can only talk about—
Q134 Chair: We are here today to talk about the Government’s industrial strategy, particularly around solar and CCS.
Jane Ellison: Okay. I cannot add to what I have said. I can only give you a general answer at this stage.
Q135 Zac Goldsmith: I am going to come to solar in a second specifically, but I just want to ask you, looking forward as opposed to backwards, given the position you now have, how do you think the Treasury can help promote the low carbon sector, particularly those areas in which we have a comparative advantage? What role do you think the Treasury should play going forward?
Jane Ellison: There is clearly a role in terms of enabling and there is also a role in terms of kicking the tyres, as I put it before, making sure that plans are sustainable and value for money. But it is a collaborative relationship. Clearly the Treasury has to be in a collaborative relationship with the key Government departments doing that because we want to deliver sustainable growth and it is never more important than now. That is all I can say. It seems to me obvious that is the way we have to work, but I think that is the way officials would feel that Treasury has always tried to work. Clearly there are other views perhaps on that, but if we are going to make that work it has to be something that we do together.
I think the Treasury does have that position of strength to be able to look across a range of Government departments where we have policy specialists in a very wide range of issues. That does give you the ability to look at how all those things fit together, basically.
Q136 Zac Goldsmith: I want to focus very briefly on solar. Solar is a sector that is a high employer, it is popular, it is accessible and we have a pretty good story to tell in this country, but over the last 12 months we have seen, I am told—according to Pricewaterhouse—a third of people working in that sector have gone, they have lost their jobs, just in 12 months. We are now hearing that from April 2017 the rooftop solar installations will face between a six and eight-fold increase in business rates as a consequence of legislation in 2000. I think most people would agree that would destroy that sector, it will just remove all incentives for people to install rooftop solar. First, is that on your radar, and secondly, what are you going to do about it, because it will be disaster for that sector?
Jane Ellison: Yes, it is on my radar. I might have to write to you with more detail, but it is worth making the point that the work that the Valuation Office does is independent in terms of work they have done on the rating exercise. I would just have a note of caution about some of the things you said in terms of impact because, as I understand it, the way that solar panels on commercial buildings have been valued is largely going to impact on bigger businesses and bigger buildings and therefore even though there may be some uprating in the value that is accredited to the solar panels that would be a small proportion of the general valuation.
Q137 Zac Goldsmith: Surely that means it would have a disproportionately big impact on the smaller installations, so the impact of that increase would be greater proportionately for the smaller installers than it would for the more industrial-scale installations that you are talking about?
Jane Ellison: I go back to my point that the Valuation Office does act independently and they reach those valuations without ministerial direction. It is something I am aware of. Obviously I am aware of the concerns that have been raised. We will be looking at it, but there is going to be a process clearly, as there always is, with the uprating. There will be a process of transitional reliefs that DCLG is looking at and we will be consulting on our approach on some of that. So there will be opportunities for further comment and examination of this and I can only give you the commitment that I will look carefully at it.
Q138 Zac Goldsmith: Can I make one further point just on that? I believe it is the case—Peter will correct me if I am wrong—that installations smaller than 50 kilowatts are already exempt and unless there was a change that will continue, at least for the short term. That is an area where I think the sector would love to hear reassurance from Government and the Treasury. You are absolutely right about the rates being set independently; that is not something that you are going to be intervening with on a personal level, and nor is the Treasury. But it is within the power of Treasury to provide exemptions, and if what the industry fears is true, that six to eight-fold increase is going to obliterate and remove all the incentives that are driving that sector forward—and the Treasury needs to work out if it is true—then the Treasury has the power to provide that exemption.
I would just simply say that what you told us this morning has been great, all the right noises, all the right signals, but if we allow that sector to collapse as a consequence of not providing an exemption that the Treasury can provide, I think it will put a huge question mark over the Treasury’s commitment to sustainability and particularly sustainable energy. I am not asking for an answer now.
Jane Ellison: Duly noted. It is something that is on my radar; I do know there is a lot of concern. I think some of it might be overstated, but clearly that is something a number of Government departments are going to be looking at and I certainly take your comments very much on board.
Zac Goldsmith: Thank you very much. I apologise, I do have to go.
Chair: I apologise, I should have said beforehand that because it is a very hot day people can remove their jackets, so just to be aware. We are going to move on to performance on climate change with a question from Alan.
Q139 Dr Alan Whitehead: I particularly want to look at the carbon budgets in relation to the 2015 Spending Review. The Spending Review, I think it is fair to say, was generally regarded as not only not contributing significantly to meeting the fourth carbon budget, but in a number of instances actively walking away in the opposite direction. In light of that, do you think that Treasury, particularly at a spending review point, has any sort of responsibility for making sure that at the point of that Spending Review the contribution to carbon budgets is a positive one and that ideally the Treasury should be shaping those spending reviews in order to ensure that those carbon budgets are met, bearing in mind that they are indeed a fundamental part of the legislative process agreed by Members?
Jane Ellison: I have already mentioned in the previous answer that it is not fair to load all of the policy-making responsibilities on to the Spending Review itself. Essentially the Spending Review gives departments their spending envelope. Clearly some projects with very significant costs are, if you like, signed off in more detail. I know myself, as a spending Minister, it is your duty to then deliver against your policy objectives within the spending envelope. Instinctively I think it is wrong to just load all the responsibility on to a spending review process. That is not what it is there exclusively to do. It is the responsibility of individual departments to then take policy decisions and to do things within that that contribute to meeting its targets. But at that point I cannot add a huge amount more because I was not there in the Treasury in the run-up to the last Spending Review. I do not know if Susan or Neil want to add anything or augment what I have said.
Susan Acland-Hood: The Treasury takes its responsibilities very seriously in this area and we did spend time at the Spending Review making sure that we did as much work as we could with departments to understand likely impacts. There is always a bit of uncertainty in this because, as the Minister said, what we are doing at the Spending Review is setting an envelope, not doing detailed policy design around what is going to sit inside that envelope. We did do some initial assessment work on the likely impact of the Spending Review on the carbon budget, which we shared with the NAO as part of the production of the report that fed into this.
That very early work suggested that the impact on the size of the carbon budget 4 gap would be minimal. The actual impacts we think will vary a little bit from that early estimate that we made and we will see those when we get impact assessments and phases emissions projections coming out over the course of this year, but it is something to which we paid close attention.
Q140 Dr Alan Whitehead: Indeed, the NAO did highlight that Treasury did do some analysis of the impact of the Spending Review on the targets, but that work was not published and remains unpublished to this day. Would it be helpful to have that published so that it would be possible to see how the Treasury had gone about its business of looking at the impacts on climate effects and indeed what pointers there might be for the future in terms of analysis of future carbon budgets?
Susan Acland-Hood: It would be more to the point to look at the assessments that are made of the policies once they are designed through the impact assessments and the emissions projections when they come out. Because, as I say, we were in a place where it was very important to us that we made our best effort to make that assessment, but we were not able to assess based on detailed policy design and that is what you would want to do in a published assessment, in my view.
Q141 Dr Alan Whitehead: Could a commitment perhaps be made today that that work will now be published, and indeed could an indication be given that, certainly as far as future carbon budgets, the fifth carbon budget, are concerned, any work that is done in relation to the effect of spending reviews on those carbon budgets will also be published?
Susan Acland-Hood: I think what we want to say is that we will make absolutely sure that the impact of the eventual policy design that resulted from the spending decisions is published through impact assessments and through the emissions projections.
Q142 Dr Alan Whitehead: No appetite for taking the 2015 workings out of the archives and putting them in the public domain?
Jane Ellison: I think you are tempting us, Alan, but I note the appetite for publication and we will reflect on it.
Q143 Dr Alan Whitehead: Thank you for that. We do, however, have the known result of the substantial—as we have mentioned—7% likely lag in the fourth carbon budget and I hear that suggestions as to how that gap might be breached are possibly the subject of some further analysis and reporting. What will be the Treasury’s role in that particular process, bearing in mind that its decisions are so central to how you proceed further? We have heard already the decision on the CCS cancellation is likely to have a severe impact on the reachability of future carbon budgets—work needs to be done in terms of catching up on the gaps that have arisen as a result of that cancellation. Is the Treasury’s cross-departmental working, for example, that has been mentioned already going to be in a position to seriously address that gap, with Treasury perhaps being at the centre of how that process works?
Jane Ellison: The Government remains committed obviously both to long-term carbon targets but to the budgets that have been set. Clearly work is ongoing and work will need to be done to set out how we plan to achieve the fourth carbon budget during this Parliament. We will do that in due course. So to that extent of course the Treasury is going to be involved, but it is not just the Treasury, it will be other departments as well. I would expect us to fully play our part in responding to that policy challenge.
Q144 Dr Alan Whitehead: Do you think it is a fair criticism that Government and Treasury, in terms of these particular issues, prefer major infrastructure projects rather than devices that can make up the gaps by other means, such as energy efficiency schemes? What role do you think energy efficiency might play in helping to meet those carbon budgets, and what role might Treasury play to a greater extent in those particular schemes as opposed to those major infrastructure projects that the Department appears to have a substantial preference for?
Jane Ellison: It is always going to be a blend of all these things. They all have a part to play. I have always personally instinctively been drawn to energy efficiency; it is one of the obvious things that we can do more of. I guess sometimes it is just a question of scale. But as I say, I do not think it is an either/or, you need a blend of all of these things, not least because—and this is a personal observation—in terms of the public interest and commitment there is to making progress towards a lower carbon future, sometimes the things that the public themselves can participate in and help to drive is a very good way of maintaining that important public engagement with the principle of the policy objective. You look at the way our constituents have embraced recycling, in a way that was unimaginable to me 20 years ago. I think to that extent energy efficiency will clearly need to be part of the blend, because it is one of the ways that you can engage individuals in a sort of, if you like, shared mission. Again, I do not know if colleagues would like to say something.
Neil Kenward: In terms of the Treasury role in this process, as the Minister has said, we do not lead it, but we have an important role to play. Certainly one of the things I and my team try to do is make sure that there is really good evidence-based analysis out there on which to make these decisions. So in terms of what are the right policy initiatives, the right tools, the right mechanisms to achieving the fourth carbon budget, we are keen that we can present to Ministers robust evidence-based analysis to help them make those choices. That is what I see as one of our key roles in the Treasury, to encourage that.
Q145 Chair: Clearly you do take the lead when it is a spending review. The other departments are not leading; you are leading that.
Neil Kenward: We take these things very seriously.
Q146 Chair: The NAO has said that you did analysis about the fourth carbon budget, which you may or may not make public, we leave that with you; we obviously would very much like to see it. The NAO said there was a substantial policy gap, so how will that gap be met? The Treasury conclusion to the NAO was that it would be met through future fiscal events, which is the autumn statement coming up now, which will arguably set the tone and set the pace for the next three or four years, or non-spending measures. It is all just up in the air for the future, isn’t it?
Neil Kenward: Exactly those questions are being worked through by the relevant departments, with Treasury’s involvement.
Q147 Chair: With a view to meeting that policy gap in the fourth carbon budget?
Neil Kenward: It is a legally binding target, so absolutely.
Q148 Chair: Is that central to this year’s autumn statement?
Neil Kenward: I cannot comment on the likely timing of any announcement.
Q149 Chair: So that maybe it is not central to this year’s autumn statement then?
Neil Kenward: I am not in a position to comment.
Q150 Chair: So a major future fiscal event may or may not have the carbon budget at the heart of it?
Neil Kenward: I am not able to comment.
Q151 Chair: But you do not argue with the NAO’s conclusion that there is a substantial gap?
Neil Kenward: Absolutely, Government figures show there is currently, on existing policies, a gap for the fourth carbon budget.
Q152 Chair: What can you do to encourage the departments to work together and encourage joint bids on environmental issues, do you think?
Neil Kenward: We do encourage joint bids, and indeed I quote from the SR15 guidance, “Where a Government objective depends on more than one department, departments should work closely to deliver it in the most cost-effective manner” and then it goes on to talk about how that might at times involve joint bids. In the case of the 2015 Spending Review there were some closely co-ordinated bids. I am not sure I would call them perfectly joint, but issues like air quality, the International Climate Fund, those were very joined-up cross-departmental bids to the Treasury.
Q153 Peter Heaton-Jones: I want to move on, if I may, to policy surrounding recycling and waste and how HM Treasury impacts thereon. I want to quote to start with from some written evidence that we have taken from the Environmental Services Association. It is four sentences, forgive me, but I think this goes to the heart of something that we need to discuss. The ESA say, “The UK met its landfill diversion targets comfortably, but continues to send around 20 million tonnes of mixed waste to landfill each year. Defra seeks to implement the waste hierarchy so that waste is only sent to landfill as a last resort. However, HM Treasury policy is no longer supportive of this aim. Its sole instrument to enable sustainable waste management in accordance with the waste hierarchy is the landfill tax, which now has the perverse effect of driving waste abroad when it could be used as a domestic energy resource”. So in four sentences there the ESA seem to be suggesting two things: first, that there is an inherent conflict between two Government departments in this policy area, and secondly, that the one favoured by the Treasury, namely the landfill tax, is—to quote their words—“perverse”. Can I ask the Minister, do you recognise any of what they are describing there?
Jane Ellison: Not really, but to be perfectly honest, I have not yet had the chance to look in any great detail at it. I think that we would say that Government does take a joined-up approach towards waste and recycling and the Treasury and HMRC play a key role through the landfill tax. I am slightly disappointed to hear that description, but it is clearly something that I will look closely at and understand why they would say that. My sense, from my relatively basic introduction to these areas in the time I have been in the job, is that this tax has worked well for much of the time it has been in operation and it has driven a very obvious result.
Q154 Peter Heaton-Jones: There is though criticism of the way the landfill tax works because of the very big difference between the two rates. The rate for inactive waste is £2.65 a tonne and the top tier is £84.40. We have taken written evidence as well suggesting that the huge difference between those two rates is frankly encouraging fraud. It is encouraging people to wrongly classify their waste because there is such a lot to be gained because of the expense differential there. Is that something HM Treasury is looking to fix?
Jane Ellison: Certainly it is something we have already had discussions about. I had a discussion pretty recently on this issue about essentially waste fraud and that issue. It is very much on our radar and we are looking carefully at it. It is a big problem and clearly over recent years has become a growing problem. I cannot tell you how I am specifically planning to respond, but I can tell you I am aware of the challenge and it is something that HMRC is looking at and thinking about very seriously as well.
Q155 Peter Heaton-Jones: We heard earlier on that for the first time I think in 15 years the recycling rate in England has fallen, the first time since the current reporting procedures were implemented. Something is not right, is it? At the same time as public education and information and knowledge of the importance to recycle is probably at the highest it has ever been, we should not surely be in a position where recycling rates are falling. Something is going wrong, isn’t it?
Jane Ellison: We would certainly want to sustain the growth in recycling rates and it is true it has plateaued, but those rates have increased massively over the last nearly two decades. Clearly we do want to sustain that and other departments as well as the Treasury are looking at how we might do that. It is worth adding to the previous answer I gave you just in terms of how seriously we take the issue of waste crime, that we have given £20 million to the Environment Agency to tackle compliance on this, because we are aware of the significant challenge.
Q156 Peter Heaton-Jones: HM Treasury is still confident that the UK will meet the 50% target by 2020?
Jane Ellison: We are committed to these targets. I do not know if Susan or Neil would want to add more though, because I cannot add a great deal of detail inasmuch as I have only just begun to look at some of this, so I do not want to tell you things that I have not yet looked at.
Q157 Peter Heaton-Jones: Understood. I asked whether you were confident of meeting the targets and you said you were committed to the targets. They are different things. Are you confident of meeting the 2020 target?
Jane Ellison: Susan, do you want to comment?
Susan Acland-Hood: It is very difficult to be confident about anything that happens in 2020, but we are clear that they are important targets and that we need to work across Government together to take all the steps that we can to meet them. I think we are all looking carefully at what has caused the plateauing in rates that we have seen and that should rightly give us some pause on our level of confidence about whether we will meet the targets without understanding the cause of the plateau and doing something about it. The “committed” phrase that the Minister has used is right, because what that implies is that we are going to look at it and try to do something about it.
Peter Heaton-Jones: Can I move on to talk about PFI then and the move from PFI to—
Q158 Chair: Before you go on, can I just come in with a supplementary, please? We have had evidence that states in the 2016 budget the Chancellor announced that the statutory targets for recycling plastic packaging waste in 2016 and 2017 would be reduced. Is that correct?
Susan Acland-Hood: Yes.
Q159 Chair: The Chancellor himself has reduced the recycling targets, so despite all the cross-Government working with Defra, the Chancellor stands up at the budget and reduces the targets. Do you think that has something to do with why we are maybe not meeting our targets?
Susan Acland-Hood: There is an important set of considerations you have to think about when you are setting targets. It is important that targets are stretching, but also that they are deliverable. If it looks like it is going to be too hard to meet then they do not have the impact that you would want. There are still some targets out there that are pulling performance in the direction we want to see it pulled.
Q160 Chair: But isn’t this directly flying in the face of everything that you have told us this morning about the circular economy and sustainability being central to the work of the Treasury? The targets for glass recycling are also going to be less than expected, so this again sends a signal to businesses that if they are going to invest in recycling plants, which are capital intensive, requiring a long-term scale, at a time when the prices for virgin materials are falling and the VAT rate for including recyclables into new goods has not changed, there are no other policy levers apart from reducing those waste targets. Why would we be surprised?
Susan Acland-Hood: We should be clear that the target is still set to increase by 2% a year to 2020, so we are still in a world in which there is an ambitious set of targets that people can see and that we are committed to, which show people that that commitment is there and that it is worth investing in them.
Q161 Chair: But at a time when, as the Minister has said, our waste targets have plateaued and have fallen back, when that 2020 target is now in doubt and may only be reached because of the work of the Welsh Assembly Government and the Scottish Government, we are sending a signal to business that over the next three years we need to recycle less glass and less plastic. How does that fit with the Treasury’s work on the circular economy?
Susan Acland-Hood: We should be clear, we are not sending a signal that we want to recycle less over time, we want to recycle more over time, but we are trying to make a trajectory that is realistic and that causes people to—
Q162 Chair: But you are softening the trajectory.
Susan Acland-Hood: It is still a clear upward trajectory.
Q163 Chair: Was there an impact assessment included of that decision in the budget? Because it is not in the public domain. Was an impact assessment done of that decision?
Susan Acland-Hood: I do not know.
Jane Ellison: I think we will have to write to you.
Chair: We would like to see that impact assessment if it exists, please, and we would like to know if it does exist. That would be helpful. I think it is important for us to understand how Treasury approaches recycling as a policy issue and how your decisions as officials and Ministers play out in the real world. I think that is quite important for us to understand as a Committee. Sorry, we are back to PFI.
Q164 Peter Heaton-Jones: Chair, you have prompted me to just stick to recycling for one more question. Domestic waste and recycling, and the extent to which it is successful, depend to a large extent on the ability of local government to be able to afford to provide those services. There are, as we know, pressures on local government budgets. My own local authority, North Devon District Council, has just announced it is going to have to start charging for green waste recycling. Can I ask for a comment, please, on that tension between HM Treasury needing to manage its budgets very carefully and putting pressure on local government budgets versus the need of local government to be able to collect our recycling to encourage us to do it more?
Jane Ellison: The comment I would make is simply that the period since 2010 I think has seen the most extraordinary period of innovation in local government that we have ever seen. I remember in 2010 there was a good degree of negativity, including from local government colleagues, about whether they would be able to work within what were admittedly difficult and tough financial settlements, given the fiscal situation that we were trying to address at the time. I think they have risen magnificently to the challenge for the most part and, as I say, we have seen that innovation, so my overall observation is that I would continue to have confidence that local government can continue to deliver against these important policy objectives, within the spending envelope that they have, through continued innovation.
Q165 Peter Heaton-Jones: I will move on just briefly to the PFI issue, Chair. The Government cancelled the PFI credits for waste and recycling in 2013. What impact do you think this has had on investors who are looking to invest in the waste sector in the UK?
Jane Ellison: I am not able to comment on that specifically; I do not know if Susan or Neil are able to.
Neil Kenward: Sorry, it predates my time.
Jane Ellison: I do apologise. Susan, do you want to add anything?
Susan Acland-Hood: I was only going to say we know that, as I said earlier, by 2010 we had quite a high degree of certainty that we would be meeting our landfill diversion targets and that meant that we could review how many projects we still required. We withdrew a provisional offer of funding to seven projects in 2010 and another three in 2013 and they were projects where the local authorities understood that the offer of funding was provisional until the projects met financial close. There is no indication that withdrawal of funding has had any negative impact on infrastructure investment. A number of the authorities, including Merseyside, North Yorkshire and South London, have carried on with their projects despite the withdrawal of Government funding.
Jane Ellison: The Government is still investing about £3 billion, which goes forward to 2042 to look at some of these major projects. But perhaps we could write to you with further comment if we are able to augment that answer.
Q166 Peter Heaton-Jones: I would like that, but there is a challenge to the answer that has just been given though. In written evidence, the Chartered Institute for Waste and Environmental Management say, “The Treasury’s PFI initiative was withdrawn early leaving a number of projects without adequate funding”. Do you recognise that?
Susan Acland-Hood: I have just described the seven and three projects that we did not take forward. I have said some of them were taken forward; others were not. I accept that. I think what I said was we have not had any indication that the withdrawal of funding has had any negative impact on future infrastructure investment or the appetite for people to invest in waste projects. We are not struggling to finance or to fund.
Q167 Chair: Just on targets, obviously we have this 2020 target. Have you had any discussion with Defra about what the 2025 target should be, particularly if we are to leave the European Union?
Jane Ellison: I have not yet, but that is probably more a function of my relative newness to this post and the fact that I am, to some extent, getting my head around a portfolio that was previously in another Minister’s brief. But I am sure I will have such discussions. I am sure officials will have discussions at official level as well.
Q168 Chair: You are aware that the Welsh Assembly Government’s target is 70% by 2025 and they are already at 59%, so they are 10% ahead of England on that, and zero waste by 2050. Do you think that is something that would be desirable for England?
Jane Ellison: I am not really in a position to comment on that. Forgive me, Chairman, I do not want to just give you an answer with no detail. Perhaps I can write to you when I have had a chance to look at that. It is not a conversation I have yet had with Defra colleagues, although I note Wales’s achievements and I am sure that we would look to always glean what we can from looking at successful projects in whichever part of the United Kingdom.
Q169 Chair: What about resource efficiency and looking at the materials availability and protecting the country from material supply side shocks in prices, for example? There was, I believe, an intention to have a review on that and that has now been scrapped. Are officials able to say anything on that?
Jane Ellison: No.
Chair: No. Could you perhaps investigate that on your return and write to us, because my understanding was that that was supposed to happen and then it did not happen. Also the reasons why that has not happened would be interesting in forming our report. Thank you.
Q170 Margaret Greenwood: We would like to understand how the Treasury could be held to account over its environmental impact. What internal and external mechanisms or institutions are there to hold the Treasury to account on its environmental impacts and are you able to say whether they have a meaningful impact on Treasury policy-making?
Jane Ellison: At the risk of sounding like a stuck record, I have not been there very long. Nothing I have seen in my time at the Treasury so far suggests for a second that people do not take these things seriously. As a country we are signed up to some ambitious targets that we have legislated for, so to that extent the whole machinery of government is well aware of the importance of meeting those targets. If you like, it is one the key pillars that is considered in all the things we do, but what you have to do is try to look across the piece at how these things work together. Inasmuch as we have these targets to meet, by the nature of it, it makes considering these things integral to what we do.
Margaret Greenwood: I wonder if Mr Kenward might like to add anything to that.
Neil Kenward: No. I would agree entirely with the Minister. There are a range of forums. These environmental goals and targets, they are cross-Government effort and the Treasury plays its role in that and we are held to account through forums like this one. For our own internal performance against our own Green Government commitments, for example, we publish those annually in our accounts. So there are various mechanisms by which I think the Treasury is accountable.
Q171 Margaret Greenwood: I want to bring to your attention a comment from the National Audit Office about the limitations of single departmental plans as an accountability tool, and it states, “Despite referring to environmental issues, the commitments that are in plans are generally vague, lacking targets or timeframe in most cases and rarely making the intended actions clear”. It also commented privately to us that the NAO team were not completely happy with the Treasury’s co-operation with their audits, that while the NAO got there in the end, the Treasury’s approach slowed them down and it meant it could not get the report to this Committee as early as it wanted to. I wondered if you would like to just comment on that observation.
Neil Kenward: That specific last point, we had a constructive dialogue with the NAO throughout and of course they asked us for lots of information. I think your point is absolutely right, that by the end of that period they produced a report that I think they were happy with, they had received all the information they required. Of course we had a dialogue with them about the information they required, why they required it, how they would use it and then we shared that information. It did take a time and I recognise that, but I think the NAO report stands as a very fair reflection of the Treasury’s role in sustainability.
Q172 Margaret Greenwood: The Government already publishes a wide range of indicators that give a broader perspective on prosperity, such as sustainable development indicators and national wellbeing indicators. To what extent does the Treasury consider these indicators when making a judgment about the health of the economy?
Jane Ellison: As a general comment, again kind of from a newcomer’s perspective, all these things are important. If you take, for example, the work, which I think is quite ground-breaking, that Treasury teams are doing with the Natural Capital Committee—I think this is also work that the ONS are doing—to understand how we value that into future decision-making, it demonstrates that the Treasury is very open to looking at something, if you like, more than just the pure bottom line cost of something, but has in mind always the broader value of things to the economy. As a nation, we want to have a sustainable economy, we have ambitious targets on climate change internationally. I think we are more than doing our bit in terms of both driving ambition, but also meeting it.
I think it goes without saying that the Treasury is clearly going to make sure that all these things are at the heart of how it thinks and go into the mix, but it is a mix in terms of how we look at things inevitably—just reflecting where we started this session and the need to make sure that things offer good value for money and that they are sustainable in their funding. Obviously the perfect policy solution is something that offers great value for money, does what it sets out to do and plays into those longer-term ambitions.
Q173 Margaret Greenwood: WWF have suggested that the Treasury could develop a natural capital stress test to assess risks associated with potential future changes in natural capital. I wondered what you make of this proposal.
Jane Ellison: I have not had a chance to look at that in any detail, so I am going to ask officials to comment. But this is an area I am personally very interested in and I think that the work that we are embarking on is one that is potentially quite exciting for the future. I am going to ask Susan and Neil if they can add comment.
Susan Acland-Hood: As the Minister said, we are very supportive of the work that is being done by the ONS to work to incorporate natural capital into the environmental accounts by 2020 and we think that that will be the foundation for a set of other things we can think about doing that will use that helpful way of thinking about and measuring natural capital, things like the WWF stress tester, the sort of thing that we could build into that process.
Q174 Margaret Greenwood: I am just thinking, 2020 is a little way off and there is a real urgency around this, isn’t there? Isn’t this something that you could perhaps bring forward to look at that particular idea?
Susan Acland-Hood: The other thing that is worth saying is that the “Green Book” and the supplements to the “Green Book” have already asked departments to make sure that they are taking into account the elements of natural capital when they are making decisions and when they are putting things forward, so things like the impact on fish stocks, for example. One of the things we are doing on a much shorter timetable is trying to pool that. At the moment a lot of that information, those requirements from the departments, exist in supplements to the “Green Book”, several of which have been produced by Defra, which form part of the corpus and we do expect departments to use and have regard to them. But it is possibly not as easy for them to do that or as present for them as it could be, so one of the things we are seeking to do through the “Green Book” refresh is to bring that material together, to couch it much more explicitly in terms of natural capital and to make it more present and forward in the “Green Book” presentation so people can find that and use that much more easily when they are making their business cases.
The “Green Book” was very explicit that the process of assessing a proposal, not just in the Treasury but across Government, is not just about value for money, it is also about making sure you have made the best possible attempt to value some of the things that can sometimes be harder to put a pound sign against.
Jane Ellison: It is quite ground-breaking work. It is fair to say we are breaking quite new ground here, there is no road map to follow in terms of how we do this. I think it is what makes the work so exciting. But there is real engagement. It was only last week, I think, that Treasury officials met with the NCC to discuss this, so it is very much a live piece of work, but we are writing the road map, we are not following it.
Neil Kenward: Thanks to one of my team who just passed me this note, they inform me that we have supported WWF in their consideration of exactly this stress test and we are having an active dialogue with them on it, so these are things we are absolutely discussing.
Q175 Kerry McCarthy: That flows quite nicely into what I wanted to ask, and I think you have answered it to an extent: how do you persuade Treasury that the word “sustainability” is not just about financial sustainability and ensuring that there is ongoing funding, but it is also about environmental sustainability? It sounds like you are very much aware of that agenda and are trying to bring it forward. WWF have also suggested that there should be—along the lines of the Office of Budget Responsibility—an office of environmental responsibility that takes these fragmented pieces of work that you are referring to, that institutionalises it, encapsulates it in one office. Have you considered that proposal?
Jane Ellison: I am aware that the suggestion was made. My feeling is that there is already a very good level of scrutiny for the work that is going on and I am not persuaded that we need that particular office.
Q176 Kerry McCarthy: I do not think it would be about scrutiny so much as driving the policy and ensuring single departmental plans—the things that perhaps are mentioned in passing there—become a reality. Our role is the scrutiny role, obviously with help from the National Audit Office, but this would be about driving it more.
Jane Ellison: It is the responsibility of departments themselves to drive forward their policy objectives. That is quite clear. We have obviously some macro policy objectives in terms of legally binding targets, if you take things like decarbonisation. But generally speaking, it is the responsibility of all of us as Ministers to drive forward progress meeting policy targets.
Q177 Kerry McCarthy: But when it is cross-cutting, I think that is the idea—the air pollution and diesel cars issue that I mentioned earlier.
Jane Ellison: No, I take that point.
Kerry McCarthy: Certainly in that situation you saw that Defra was passing the buck to DfT and then often the Treasury is used as an excuse for inaction.
Jane Ellison: At the risk of being slightly ruled out of order again in terms of referring to past experience, I just give you that reassurance. If you take, for example, air quality, as Minister for Public Health I was part of a cross-ministerial team looking at that very issue. On that one I can give you personal assurance that in fact far from it being departments developing responses in isolation, it was an attempt to develop a cross-Government response to the challenges that we faced.
Q178 Kerry McCarthy: We could have a whole debate about how I feel the Government has rather dropped the ball on air pollution, but let’s not go there.
You mentioned targets in a very approving tone, but the impression I get is the Government is very ideologically resistant to targets. If you look at the discussions that happened at EU level on the circular economy package, it was the UK Government that seemed to be arguing against mandatory targets in those proposals. Indeed, I have some answers to parliamentary questions that suggested the UK thought its main achievement was having the word “voluntary” inserted throughout the text.
I suppose what I am getting at is, on targets, regulation and an interventionist approach to some of these things, it seems to me that the UK Government, and England in particular, are not particularly enthusiastic about that approach, whereas if you look at what Wales and Scotland have done on recycling, on the circular economy package, they have jumped in and gone ahead with those proposals rather than waiting for the EU to give us a steer.
Jane Ellison: I am sure the officials can add more detail, but let me make a general comment about our response. I will be open about the fact that to some extent it is a political decision by the Government, by my party who formed a Government, that we are very keen to protect member state competence in the EU environment. I think for the most part that has been quite a common thread through most UK Governments, but particularly it is true of this Government, that we do strongly want to ensure that we retain the right mix of EU ambition but member state competence.
Again, drawing on previous experience, there was a strong move towards some areas with targets. They can often have a very perverse effect if you set them in the wrong way at an EU level. As a Government, I think we are always quite keen to make sure that EU targets and areas of member state competence are not used as a way of ending up constructing a large policing regime, if you like, around an area that is essentially for a country to make its own decisions in. That is a general comment as an approach to competencies. I do not know if there is any particular comment that Susan or Neil want to make on the specific.
Q179 Chair: Can we just have a quick look at the “Green Book” and how you price in risk? We had quite a lot of evidence that despite trying to integrate environmental risks into the “Green Book”, a lot of stakeholders were concerned it was not adequately accounting for risk and that risk does not appear to have been incorporated into the Treasury’s working methods. Perhaps we could hear from the officials about that and about the tools and decision-making approaches that you use to deal with climate risk and also how you value the health and wellbeing effects as opposed to the short-term financial effects, because there is always a trade-off, is there not, between them?
Neil Kenward: Shall I kick off? The “Green Book” is very explicit about the need to take environmental effects into account, even when those are not easily quantifiable and it says, for example, “The valuation of non-market impacts is a challenging but important element of appraisal and should be attempted wherever feasible. These approaches can be complex but are equally as important as market impacts”. So there is a very clear steer that departments, when they are putting together a spending bid or a project or programme, should be taking the full range of issues into account and that would include risk. That would absolutely include a good assessment of risk. That same guidance applies to spending teams like my own and we are working with departments on their bids and their projects and evaluating those. So we absolutely consider risks as part of our work.
Q180 Chair: What about cumulative risks? I do not know if you have seen our recent report on the Department for Transport. Have you looked at that?
Neil Kenward: I am aware of it; I have not read it.
Q181 Chair: It is a good read and I do recommend it because it is material to the spending that you sign off. We found that there is a positive approach to sustainability in the Department and it has a robust project appraisal system, but we also found that each individual road decision was approved in isolation, not cumulatively. So the cumulative impact of lots of different roads being built was not measured by the Department, and presumably, given that you were not signing off the money, the Treasury was not looking at that cumulative impact either. Of course then you are always looking at the economic advantages of road building, you are not looking at the sustainability advantages of getting more people to walk, cycle or take public transport.
Neil Kenward: Without wanting to pass the buck, as per the introduction, I am responsible for energy and environment and we have a separate team that cover transport issues and I will commend your report to my colleague who runs that team, but I wonder if Susan would like to talk about those wider issues.
Susan Acland-Hood: I look after both teams so I cannot pass the buck, tragically. There are couple of things to say. We know that there are a set of things in the Department for Transport’s appraisal methodology, so the project by project point is a worthwhile point and something that we are happy to look at. We do of course also look at road building as part of the road investment strategy process and we look at RIS as a whole in the Treasury as well as looking at individual road-building projects. At Spending Review, we did also make sure that the Department for Transport was giving us climate impact on their spending bids in totality, not just road by road. We do try to look at that.
I think it would be right to say that we acknowledge the complexity and difficulty of trying to make those assessments in a fully rounded way that takes account of absolutely everything that one could possibly take account of. We do also in the Treasury spending team that deals with transport look at the environmental benefits of walking and cycling schemes, for example, compared to road schemes and make that part of the assessment.
Q182 Chair: Once these projects are through the “Green Book” hurdle and it is set out in compliance, how do you determine whether or not it ultimately goes ahead? How do you rank the proposals, because obviously it is a limited spending envelope, isn’t it?
Susan Acland-Hood: On the capital side we use net present value methodology as one of the key ways—
Chair: Net asset value?
Susan Acland-Hood: Net present value.
Chair: NPV, yes.
Susan Acland-Hood: NPV as one of the main ways in which we offer Ministers decisions to take about project choice. But ultimately these are ministerial decisions.
Q183 Chair: Based on a pretty bald accounting model then, NPV?
Susan Acland-Hood: We offer them NPV. We will offer them other analysis alongside that, including on things like environmental practice.
Q184 Chair: How would you present that environmental advice?
Susan Acland-Hood: It varies according to the decision that has been taken.
Q185 Chair: Can you give us an example of one?
Susan Acland-Hood: Yes, I could. When we look at investments in walking and cycling schemes we will show the environmental benefits of those schemes as part of the assessment we give to Ministers.
Q186 Chair: Those environmental benefits are quantified in terms of recycling rates or reduction to landfill or other?
Susan Acland-Hood: Sorry, I should have said climate benefits. I apologise.
Q187 Chair: Climate benefits, okay, thank you. Can you just finally tell us what range of evidence you drew on when assessing the fourth carbon budget and how did it influence your assessment? We have had evidence that you used the CGE model, the computable general equilibrium model, and we have heard that the Treasury was against that budget because the findings of this model suggested it would harm and limit economic growth. Is that the case?
Susan Acland-Hood: Can I just be clear, are you are talking about the fourth or the fifth?
Neil Kenward: I think this may be about the fifth carbon budget, which was set earlier this year and that is the 2028-32 budget. So the CGE model, as you suggest, was one of a number of inputs into the decision-making process, analytical inputs, of which there were many. The Treasury paid particular attention to the ones that were trying to measure macroeconomic impacts and the CGE model was the one that focused most on that. It was a joint project that we conducted with DECC, as was, and it is, as I say, only one part of the picture. The CGE model is quite specific, it looks at static impacts and the kind of main conclusion of that, which I think is published in the evidence surrounding the setting of the CB5 level, was that the impact on GDP from this modelling exercise would suggest a lower level of GDP of between 0.2% and 0.7% in 2030 due to the CB5 level that was set. It was one of the factors that was taken into account. We did it as a joined-up exercise with DECC and it informed the advice that we put to Ministers.
Q188 Chair: The evidence that we had was on the fourth carbon budget, which was made during the coalition’s time and the difficulties of the use of the DECC modelling to look at impact assessments, but it sounds like you have only relatively recently joined the Department, is that right?
Neil Kenward: I have been in my post almost two years, but the setting of the CB5 process is the period I have been in post.
Q189 Chair: They do assume that there is no unemployment and no inefficiency, don’t they?
Neil Kenward: The model is a particular type of economic model. There are a range of models used by DECC, and by BEIS in particular, when thinking about the fifth and future carbon budgets and modelling the costs and impacts of those. The CGE model only does what it can do. As I say, it is a static model, it is based on national income accounting identities, and that means it does not take account of those kind of transitional effects, as you say, of transitioning from higher carbon to a lower carbon industry; those transition costs and potential stranded assets are not taken into account by the CGE model. There are different things different models can do and inherently this is a very uncertain issue. In terms of these impacts we are looking 15 years hence at an unknown set of parameters.
Susan Acland-Hood: I think one of the things that is very important is that the Treasury, like anybody else who does modelling, understands that no model is perfect and we will use a range of models in order to make sure that we understand these questions from a range of different perspectives.
As Neil said, it is difficult for us to comment on the carbon budget 4 process, I am sorry about that. I can ask someone to provide some more information on it if that is useful, but I can talk quite authoritatively about the carbon budget 5 process that we have just gone through. We did that jointly across Government. We used the CGE model, which has some things it tells us not perfectly, but is a well-respected internationally used form of modelling. It also allows us to make comparisons with other things. There is a long-term pathways model called UK TIMES that we use; there is the GLOCAF model, which looks at the contribution to global efforts to reduce emissions; we use marginal abatement cost curves to a great extent, working with BEIS. What we did through that process I thought was quite positive, in that we brought together a range of different modelling capabilities across Government. We looked at the different results they gave together and we tried to understand what they were telling us about the whole picture in a rounded way.
Whenever you do that, whenever you get people and their models in a room together, people will have vigorous, enthusiastic, analytical debates about the basis of the model and what they are telling them. To my mind, that is a very creative and productive process because it helps us to understand the picture well.
Q190 Chair: Once you have had those vigorous debates, how do you then allocate to departmental budgets the benefits across departments? Once you have decided what the models do, how do you then go back and say, “If we do improve air quality the Department for Health will save X or Y amount by X or Y date”? Does that happen?
Susan Acland-Hood: What I was describing there was the process for setting carbon budget 5, so that was about trying to support Government’s decision on whether to take the Committee on Climate Change’s advice in setting carbon budget 5; we decided as a Government together that we would do. We do not tend to use the models to try to allocate point savings back into departments. One of the ways we run the Government finances as we do—that is not just in the environmental space; you will know this very well from public health. Trying to make point decisions about likely future savings and allocate them with enormous precision is a mug’s game, in my view. There is a reason that we operate the public finances in a way that allows us to manage that across departments, but also to bring together savings into the Treasury and then reallocate them against the needs that we see emerging. That is how we do it.
Chair: If there are no further questions, thank you very much indeed for your time and we look forward to receiving your correspondence on those points.
Jane Ellison: Thank you, we look forward to getting your report. I think I will have lots of good reading there, Chairman.
Chair: We will get it out before the autumn statement; we are determined to.