John McTernan: Stop grandstanding over fuel levy - we've won

Three words have dogged Scottish Secretaries for the past five years - fossil fuel levy. Successive First Ministers have demanded that this money be rendered unto Scotland.

The latest salvo came at the weekend when the First Minister revealed, in an article in Scotland on Sunday, that he had written to David Cameron asking - yet again - for the money in this fund, now some 191 million, to be released to the Scottish Government. He thundered: "The Tories and Lib Dems came to office pledging a 'respect' agenda towards Scotland. Their behaviour so far over the fossil fuel levy has failed to meet that standard."

He cited an array of Scottish business, trade union and green organisations, including SCDI, the STUC, Friends of the Earth Scotland and the WWF who have written to the Chancellor backing this call. This broad coalition suggests a massive consensus behind Alex Salmond's call and a matching negligence on the part of the Scotland Office which, the First Minister asserts, has lined up behind the Treasury denying Scotland money it is due.

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However, the reality is a little bit more complicated. For one thing, the fossil fuel levy is the Schleswig-Holstein Question of Scottish politics. As Lord Palmerston reputedly said of the former: "Only three people understand it, one is dead, one has gone mad, and I have forgotten all about it". For another, Michael Moore, the current Scottish Secretary, negotiated a cunning deal with the Treasury, which offered the Scottish Government access to vital funding for renewable energy. The row turns, not on the existence of the money - all agree that there is a large and growing fund - but on the precise Treasury rules governing its spending. The fund itself exists as a relic of the system for subsidising renewables before the current one of renewable obligation certificates (ROCs). The fossil fuel levy was - as its name suggests - a charge on generators who used fossil fuels, which was used to subsidise the difference in cost between electricity generated cheaply that way and the far more expensive, but cleaner, renewable energy.

The new system of ROCs, by mandating electricity companies to purchase electricity from an increasing proportion of renewable sources, has been successful in supporting rapid expansion of renewable energy. And in this case, the consumers - you and I - pay the subsidy through an increased electricity bill. But the success of ROCs left a fund of already-paid fossil fuel levy - a fund that grows each year simply as interest adds up. The battle between Alex Salmond and David Cameron is all about this.

On the face of it, the First Minister makes a common-sense point.The money can be used only for promoting renewable energy in Scotland, so why not release it to the Scottish Government to support its ambitious programme of offshore wind? The problem is that public spending rules are very clear. The money raised by the fossil fuel levy is government revenue. It has been counted coming in as income, so it has to be scored going out as expenditure. The difficulty crystallises here.

The total of government expenditure is always carefully controlled by the Treasury because the scale of public-sector borrowing affects the country's credit-worthiness globally. Even before the credit crunch, spending was so tight that it was repeatedly explained to the Scottish Government that the money couldn't be used to increase the block grant beyond what was fair shares according to the funding formula. The 191m was available, but only as part of the block, not as an increase. The only way to have given the Scottish Government more would be have taken the equivalent out of spending in England. With negative perceptions about Barnett's generosity to Scotland growing amongst English taxpayers, no UK minister - of whatever party - was ever going to cut health or education by that much to allow Scottish spending to grow. This was only exacerbated by the deficit-reduction plans of the coalition.

This is why Michael Moore's achievement in the comprehensive spending review was so significant. The first 250m of the funds of the Green Investment Bank will be earmarked for Scotland if the claim on the fossil fuel levy money is relinquished. In effect, an increase in Scottish spending is being accommodated as a pre-emption of UK wide funds. The premium of 60m is a bonus to reward flexibility.

The complaint by Alex Salmond, and a recent Scottish Parliament resolution, that this is sleight of hand, is surely wrong. The cleverness of the proposal is to allow new money to Scotland without a corresponding cut in Scottish or English spending. If you accept that the Treasury has the right - indeed the responsibility - to manage total public expenditure in the UK, then this is as good as it gets. And if you don't accept Treasury needs to set UK-wide spending limits, then I'm not sending you down to the bond markets to finance Britain's deficit.

Now, Alex Salmond protests that Scotland should anyway scoop a huge proportion of the Green Investment Bank because Scotland is going to be the primary source of renewable energy. So this, he argues, is double counting. Scotland should get the vast majority of the Green Investment Bank money, and the fossil fuel levy on top. Of course, if Scotland's case for green investment is so good, it will get the lion's share of the remaining 750m in the bank.

There comes a time when a case has been made often enough and a deal has to be struck. The Treasury offer is real, and it is clever. It works for both sides - removing a grievance and releasing a resource that can be planned for.It really is a win-win, an offer Alex Salmond can't refuse. Unless, of course, it was never the money he wanted, but only the grievance and the row.

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It's time for Michael Moore to sell the deal he won. The coalition of Scottish organisations the First Minister assembled to support his case to the Chancellor should be told: You've won a great victory in principle, now help change the Scottish Government's mind as it is the block to accessing the funds. The world has been turned upside down.