On 20 October 2010, the Chancellor of the Exchequer, George Osborne, set out the Government's four-year public spending plans in the Spending Review 2010.
The Review has received a mixed reception. Whilst plans to proceed with the creation of the Green Investment Bank, and to continue with feed-in tariffs for small scale renewable generation at least until the next formal review were generally well received, the Government's proposed changes to the Carbon Reduction Commitment Energy Efficiency Scheme, diverting recycling payments into Government coffers, have proved to be more controversial.
Despite the period of austerity ushered in by the Spending Review, and operating within the financial limitations it has imposed, it seems the Coalition still aspires to be the "greenest Government ever".
DECC and Defra budget cuts
The Department of Energy and Climate Change (DECC) and the Department for Environment, Food and Rural Affairs (Defra) will have to cut their overall budgets by 30% and 29%, respectively, by 2014-15.
Each will publish an individual business plan in November 2010, detailing how it plans to achieve these overall reductions.
Government announcements concerning changes to public bodies (such as the Environment Agency and the Committee on Climate Change) were made on 14 October 2010 (the list of public bodies and the Government's plans for them is available here).
A new "Carbon Plan" for the UK
The Government announced in the Spending Review that it will be publishing a new Carbon Plan in 2011, setting out how the policies of each Government department will contribute to achieving the UK's target to reduce greenhouse gas emissions by 80% (below 1990 levels) by 2050.
It is expected that the Carbon Plan will follow on from the Government's work on its 2050 Pathways Analysis to secure the shift to a low carbon energy system (see the DECC website for more information on the 2050 Pathways Analysis).
The Green Investment Bank
The Government will proceed with the creation of a Green Investment Bank (GIB) and announced in the Spending Review that it will be capitalised with an initial investment of £1 billion of public money. The availability of £250 million of this amount is subject to the Scottish Executive agreeing to the drawdown of funds from the Scottish Fossil Fuel Levy surplus. Additional public funding for the GIB will come from the proceeds of the sale of Government-owned assets. It is hoped that the remainder of the funding required for the GIB's activities will come from private sector investment.
This announcement has so far received a mixed reception. The level of funding provided will disappoint those expecting the bank to be capitalised with between £4 billion and £6 billion of Government funding. Environmental groups have been reported as saying that the GIB will need significant further funds if it is to be effective.
More will be known when the Government finalises the design of the GIB, and the products it will be able to offer, which is expected to happen in Spring 2011.
The Climate Change Levy and carbon pricing
The Spending Review did not shed any light on the details of the Government's plans, announced initially in the Coalition's Programme for Government and confirmed in the June 2010 Budget, to introduce a floor price for carbon through reforms to the Climate Change Levy. However, the Government did announce that it plans to publish a consultation on its proposed reforms in November 2010.
The Carbon Reduction Commitment Energy Efficiency Scheme
The Spending Review announced that the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) will be "simplified to reduce the burden on businesses".
The first sale of allowances will now be in 2012, rather than 2011. However, controversially it is now proposed that the revenue from the sale of allowances (expected to be £1 billion a year by 2014-15) will now be directed into Government coffers rather than recycled back to participants, leading to comments that this is a "stealth tax".
This goes beyond one of the possible options considered by the Climate Change Committee in its report to Government, published on 28 September 2010, which mooted dropping the recycling of revenue to scheme participants for the second phase of the CRC (from 2013-2017). Whilst the Committee acknowledged that such a move could be attractive from a fiscal perspective, it did raise two concerns which, now that Government has decided to divert recycling payments into public funds during the first phase of the scheme, will doubtless be the subject of further debate.
Firstly, the Committee stated, when discussing dropping recycling payments, that,
"It is not clear how this would impact on incentives for energy efficiency improvement. On balance, impacts from dropping revenue recycling could work in different directions, with the net impact uncertain based on available evidence."
There is concern that without a direct financial incentive under the CRC to improve efficiency, the publication of league tables and the prospect of being named and shamed may not be sufficient to drive companies to make the efficiency savings which the CRC is intended to produce.
The Climate Change Committee also pointed out that the economic rationale behind removing the recycling payments would depend on the design of other carbon price instruments (ie, together with the EU Emissions Trading System and the reform of the Climate Change Levy, this could become a "triple tax" on carbon).
Further changes have not been ruled out; the Government merely stated in the Spending Review that "further decisions on allowances sales are a matter for the Budget process".
Feed-in tariffs for small-scale renewables
Ahead of the Spending Review concerns were raised about the prospect that there would be a reduction in support for small-scale renewables, provided via the feed-in tariff regime introduced in April 2010.
Government has said that the feed-in tariffs will remain unchanged for the time being, but has not ruled out changes as the efficiency of the tariffs will be considered as part of the next formal review. Any changes made to the regime would therefore be implemented in 2013, coinciding with any changes to be made to the Renewables Obligation.
The Government has however said in the Spending Review that it plans to re-balance feed-in tariffs in favour of more "cost-effective" carbon abatement technologies. In addition, the review could be brought forward if there is higher than expected deployment of certain technologies.
The Renewable Heat Incentive
The Spending Review confirms that the Renewable Heat Incentive (RHI) will be introduced from 2011-12. The Government has announced that it will not be taking forward the previous Labour Government's plans to fund the RHI through what the Coalition regards to be "an overly complex" renewable heat levy. Instead, the RHI will receive £860 million of funding to be provided from Annually Managed Expenditure. The Government aspires to shift renewable heat "from a fringe industry firmly into the mainstream".
The Green Deal and fuel poverty
The Government has confirmed its plans for a Green Deal, which will enable householders to improve the energy efficiency of their homes through savings made on their energy bills.
Additional support to combat fuel poverty by improving heating and insulation for the most vulnerable households will be provided by energy companies through the Green Deal and the Social Price Support. This will enable the Warm Front Scheme to be phased out by 2013-14. The Government plans to carry out a review of the target and definition of fuel poverty before the end of 2010.
Clean-up of the UK's nuclear legacy
Government spending on the clean-up of the UK's nuclear legacy (described in the Spending Review as "energy liabilities") will increase over the next four years as the Nuclear Decommissioning Authority's commercial income is expected to reduce. However, the Authority will be carrying out a "significant programme of reform" intended to help it to become more efficient.
Carbon capture and storage
The Government has said it remains committed to providing £1 billion of public funding for commercial-scale carbon capture and storage (CCS) demonstration plants. The funding will come from general public spending, rather than from the introduction of a levy on electricity suppliers. However, the Government will decide on whether it should introduce such a levy to fund future demonstration projects once it has finished its review of the Climate Change Levy in November 2010. With the withdrawal of E.On's Kingsnorth power station from the Government's initial CCS competition ScottishPower's proposed CCS project at the Longannet power station in Scotland is the sole remaining contender.
In the Spending Review, the Government pledged to invest £200 million in the development of low carbon technologies, including offshore wind manufacturing facilities at port sites and wind turbine research and development. The news should help to allay concerns that the wind industry in the UK, and as a result the broader UK economy, was suffering through contracts for wind turbine development and manufacture being awarded to companies based overseas.
Conclusions and further information
Taking everything into account, whilst there are highs, lows and some controversy (particularly in relation to the changes to the CRC) the overall feeling for those affected by the energy and environment related issues in the Spending Review seems to be that things could have been a lot worse. In the circumstances, and following on from Chris Huhne's Statement on Energy Policy, this can be regarded as a positive result, and a sign of the Government's commitment to contribute to a green future for the UK.
The full text of the Spending Review is available here.