Q405 Mr. Dave Anderson: Can I ask for more detail on the funding. Your report said that the Government has a long-standing commitment to the principle of environmental taxation but has completely failed to capitalise on it so far. What do you mean by that and what can we do about that?

Mr Jenkins: The statement about the fact that it had a commitment to it started in the 1997 Pre-Budget Report when there was a statement of intent on environmental taxation with the general principle of increasing taxation on "bads", such as pollution, and reducing taxation on "goods", such as employment, mainly through employers' National Insurance Contributions. During that period up to a high watermark of 1999 there were environmental taxes that were brought forward - the Climate Change Levy, Aggregates Levy, increases in fuel duty, increases in the Landfill Tax - and many of those, not the fuel duty but many of the other ones, also included cuts in employers' National Insurance Contributions as a reduction of taxation on employing people. At that point the progress in terms of increasing green taxation stopped and there was a large hike in employers' National Insurance Contributions as well that removed the benefit that had been gained from environmental taxation at that point. The commitment still stands, however, as a percentage and the Green Fiscal Commission's report recently has got the data in thereon the percentage of the tax-take that is green in some senses has reduced since that time. One of the things that the Green Fiscal Commission also points out is that there needs to be more public debate about these things. The way in which green taxes have been used so far in some cases has been good and in other cases has led to argument and accusations of them being stealth taxes in some way. There needs to be a very open discussion about that to be able to move forward. The Climate Change Levy, for example, is a tax, the revenues from which are used to cut employers' National Insurance Contributions. They are also used to provide enhanced capital allowances, a tax break for investments by those firms in the correct things. There are negotiated agreements that allow them to commit to make reductions for only paying 20 per cent of the tax rate, and also an exemption for renewable energy. Also it was the method by which the Carbon Trust was set up to provide advice and saves UK businesses £1 million a year in its current form. Those sorts of models about how green taxation can be taken forward can be learnt from and the Green Fiscal Commission's report shows that. Also, not only is there an issue about being able to use green taxation in terms of shifting the tax base towards those things and particularly on to carbon, that is a longer term debate and needs public debate about exactly how it is going to happen, there are implications in terms of how regressive it is and how effective it is, but that debate should be had in earnest and in public. In a stimulus package, and we have seen this in the US, there are some short-term options of providing significant tax breaks for where investment is really desperately needed that can be paid for by increases in other taxes or even windfall-type taxes that have been brought out. This country has the tax on utility where it is believed that a public policy had led to a loss or an inefficiency to be able to claw that back. There has been some debate, for example, about the free allocation of permits under EU ETS to energy companies as one possible option. We have not looked at that but there are these options of a shorter-term use of taxation to provide stimulus as well.

Q406 Mr. Dave Anderson: Can you take us through how green bonds would work in practice?

Mr Jenkins: Yes. Green bonds are both growing in terms of quantity and diversity in terms of how they operate. Just to give some examples. In 2004 the Bush administration in the US brought in $2 billion of triple-A rated bonds for a combination of brownfield and renewable energy development sites. In 2007 the European Investment Bank brought out its climate aware bond. In 2009 the US, as part of the Obama administration's stimulus package, brought in another $2.2 billion of green bonds which were directed specifically at renewable energy. Largely, a bond works on the idea that you are getting somebody to lend the government money that they will pay back and you can direct that both at institutional investors, where most gilts are put forward, but also there is an argument for being able to look at retail investors through, say, a green top-up on ISAs. We are at the beginning of a process where the diversity of this as a vehicle is expanding rapidly and it is something in the UK we need to have a debate on how that might work. Broadly, often how they work is they look at how investment can be encouraged that will provide a return that allows the government to be able to pay those investors back. Where there are clear economic benefits of doing so, renewable energy being one, energy efficiency being another and the grid investment being another, where you know there are savings to be had and they are able to pay them back, they will be able to use those. You can have different timescales and some of them provide coupons where you are paid on a yearly basis. For example, the EIB climate aware bond does not pay a coupon, in five years' time you just get back the face value plus an amount that is indexed to the FTSE for good rating. There are many ways in which the detail of how they operate will happen. The big thing is there is a real demand both in the investment market and in the policy area to be able to develop these bonds going forward. Broadly, they are effectively getting people to lend you money to do so. They have got to feel it is a very good deal, a good return for them to do so, and for the UK it has got to be a clear economic benefit. The elements of the green stimulus package that we are putting forward, all of them have that ability to be able to pay.

Q407 Mr. Dave Anderson: Is anybody promoting this? I am not saying this in a bad way but it almost sounds too good to be true. If it is as good as you say it is, why are we not getting on with it?

Mr Jenkins: There is a lot of debate and various bodies. I can certainly send you documents of people who have come forward with suggestions, such as the Aldersgate Group and there is another group within the City that is putting forward ideas, Climate Change Capital. These are in the detail of exactly how that operates. There is a connected proposal about being able to disburse those funds and whether you do that through a green investment bank is another idea that has been put forward. I can certainly provide summary documents on those to the Committee.

Mr Smith: To underline how those things might be used, we are doing a project at the moment where we are working with DECC, CLG and the Housing and Communities Agency, and we are looking at a project that is called Delivering Neighbourhood Retrofit which is looking at the scale of the challenge we have in increasing the efficiency of the nation's housing stock. Yesterday the Committee on Climate Change were discussing the report and said they estimate £15,000 per household, that is on average, may be needed. Different commentators say different things. Those ranges are from £5,000 to £80,000 per house. The £80,000 is problem houses, if you like, or hard to treat houses. We know the scale of investment is going to be difficult to achieve. The Government's vehicle so far has been either through direct grant funding, so fuel poverty schemes where they provide funding directly to householders, or through utilities, so we have the supplier obligation where a percentage of people's bills is used to fund back energy efficiency measures, but we know the scale of that is going to be very difficult to achieve just through those routes, so the Government does need to look at options. One option is through green bond-type routes. Another option is through the pay-as-you-save market where somebody takes on that work and the cost of that work and it is recouped over time. The Government is looking at trialling some of that. We also know from discussions with financial institutions, particularly pension companies, that they are looking for long-term investment vehicles. One of the lessons from the financial crisis is that they need to look more closely at different types of investments they choose, so they need shorter term investments but also long-term guaranteed investment routes. They are interested in this but, again, they need the Government to set the framework for that market. It is worth highlighting that it is not just Government at the UK level, although that is obviously critical, but local government as well. There are examples of local authorities who have done very good work on energy efficiency, on local generation, and these forms of investment could help them. There are links there to pension funds that local government and the public sector have stakes in or help manage.

Q408 Mr. Dave Anderson: You have moved on to the Government's role and in your report you say there is a need for the Government to take a stake in the ownership of energy related assets. How is that different from old-fashioned nationalisation? You also say that we will learn from the financial crisis, but are you saying the situation in energy is as serious as it was that faced us a year or so ago in the financial field?

Mr Smith: On that second point, there are concerns about the long-term investment in future generation and creating the vehicles that will produce efficiency gains, so demand reduction. We are not seeing the scale of investment needed to meet future sources to allow us to diversify and move to a low-carbon form of generation both for standard electricity generation and, as I said earlier, for things like electric vehicles. The market is not shifting quickly enough so Government needs to look at what it can do through regulation and investment to do that.

Mr Jenkins: One of the proposals is that at this time, and we have seen it in the finance sector and more recently in the public transport sector with the East Coast Main Line as well, Government in those particular cases does so as a method of saving particular institutions. We have raised in the green stimulus package that one of the options that could be looked at is whether particularly in the energy sector where - significant is almost a term that is not sufficient enough to be able to describe it - significant investments are required in the next two decades, it may be one of the options for them to do is to look at taking an equity share in some of those infrastructures, particularly when it will be government money that is often flowing through those, to help them develop particularly within the grid or particular pieces of infrastructure. We have had debates and discussions around that and we put it forward as one of the ideas that needs to be looked at in the options. We do not have any specific proposals on that but we are having discussions about how that can be taken forward.

Paddy Tipping: Let us move on and talk about new priorities. We are having a valuable discussion but in order to make the best use of our time if we can be a bit more focused, and I am talking to my colleagues as well as you two - I was going to say "lads" but that is a bit demeaning; it is where I come from.

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Q441 Mr. Dave Anderson: I think my question has been covered, Chairman, but I want to raise this issue again about your contact with the government. If somebody coming along with a really good idea, for example I support somebody making variable speed pumps, and there is the potential for those to be installed in something like 16 million homes in this country, at a relatively small cost relative to what the savings could be; how would you get that idea into government circles so they can think, right, this could work, it could be a way forward?

Mr Aldridge: Can I start because I mentioned the building regulations and we are quite pleased with the progress there. Variable speed drives for example in air-conditioning were introduced - and I was involved in this - in the last round in 2006 and that has transformed the market absolutely on that side and the energy savings for the drive alone are of the order of 40 to 50 per cent of that energy, so there is already some evidence that it is in and working more in the non-domestic area. We are in discussions at the moment about achieving the same sort of effect for the pump systems for hot water, heating and indeed cooling water, to try and introduce that benefit into the non-domestic side. Quite how you get that across to households ---

Mr Timmins: It is quite a relevant example in the context that we are looking at for heating controls. There are couple of things. Firstly, the best research that we have seen says that 70 per cent of people have said that the decision on their heating system was made by the heating installer. 70 per cent admitted it, so there is probably a greater percentage than that. It makes sense really. If you are going to spend money on somebody to do work on your home they are the person you are going to listen to for advice, so we need to make sure that in the installer network for heating systems and lighting systems and lighting controls, that the installer who deals with the consumer or the person making the payment is an ambassador for energy-saving technologies. That is a process of education and a process of validation. It is giving them the tools whereby they can sell something that might be more expensive but they can show the benefits to the customer and that it is independently validated. That is how between government and industry we can probably work to deliver something like that. You mentioned the pumps and systems are a complex area. We have had a big debate about heating systems with the European Commission and, as a consequence of that, we are hoping there will be the introduction of a label that will allow the installer to label the efficiency of the system that has been installed in relation to the existing components. You could also then extend that to giving the installers a tool that they can go out to people and say, "Look, this shows that if you do this with the pump, if you install these heating controls, if you do some balancing of the system and put water treatments in, all the things that can help with efficiency, that is the end improvement to you. There are thousands of boilers being replaced every day. There are thousands of interactions between consumers and installers, and those are the things that we need to make use of because we cannot expect that every day people are going to go off and look at a website or get some advice about what they should do to improve energy efficiency. We know these interactions are happening, so those are the opportunities, and that is where I think the heating and hot water taskforce that Howard mentioned, which is not something we have set up but it is something we have been very involved in, is a real opportunity for us to sit down and talk about these technologies and say what is the real potential, how can we do that, what are the capacity issues, what are the training issues. It is about government and industry just talking about what needs to happen and how it can be done. It is not industry reacting to something that is being proposed, where I think it does get a bit oppositional because we have our own interests and government has already set something out that it wants to do. We want to try and avoid that and deal with these technologies as something that needs to happens, what are the barriers, what are the solutions, and what can we both do to make that happen.

Dr Porter: I think there is always a role for the regulatory backbone of doing this. Whether it is a heating installer, a lighting installer or somebody installing something in a high-voltage network, if there is appropriate regulation behind it then that stimulates the market to make sure that the inappropriate stuff is not put in. Back to the installer example, it is about educating the installer about what they have to do but once the regulation is in place then the training and the skills have to follow to make sure that that professional operator actually understands the detail of what can be done. Back to this partnership issue, I think one of the key things that I have discovered in many years of working with industry and government is we have to accept that the civil servants who are making very important decisions or recommendations to ministers are not experts in all these technology areas; nobody can be. I think we accept that it is our role to help to - I would not say educate, that is the wrong word - to inform civil servants making decisions on the technologies available, what the differences are, but then there needs to be a quid pro quo, there needs to be a reasonable response to the opportunities out there, and I think that really is the way forward. We can discuss all day the options of how we can do it but it is that partnership approach that we could set up within the heating area that can be expanded to many other areas that we are not covering today, to really identify where real, cost-effective savings can be made and why is it not happening. It may not be government, it may be somebody else who is causing the problem - but government can provide a little bit of a push or a squeeze or a bit of new regulation that removes that barrier and allows that to happen.

Paddy Tipping: I do want to talk about smart meters, which has come up during the discussion quite a lot as an area where we need to talk to officials about the technologies.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

The full transcript may be read here.

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