Examination of witnesses (Questions 1
- 19)
THURSDAY 23 JULY 1998
PROFESSOR JOHN
H CHESSHIRE and MR
NICK HARTLEY
Chairman
1. Good morning, Professor Chesshire and
Mr Hartley. Thank you very much indeed for coming along this morning.
I apologise for the fact that we will probably have people moving
in and out over the next half an hour or three-quarters of an
hour. There are one or two other committees going on at the same
time which may not last very long. We normally meet on a Tuesday
morning, as you know, so Thursday morning presented us with a
bit of a problem, but I hope we can overcome that. Secondly, can
I thank you very much indeed, Professor Chesshire, for your memorandum
which was admirably succinct, if I may say so. Given the amount
of paper we have to consume normally, we were very grateful for
such a clear and brief explanation of the situation as you see
it on energy policy. As you know, the point of these sessions—we
are having one on water, one on Europe, one on energy and one
on forests and trees—is to look at three or four subjects
which we believe are high on the list of things we should be looking
at to inform ourselves better as to what the real issues are so
that we are fully conversant with the approaches which we should
take and, secondly, to try to help us to decide what priority
we should accord to the various issues. Obviously, energy is clearly
very central. Is there anything you would like to add to your
memorandum, Professor Chesshire, before we ask questions?
(Professor Chesshire) I do not think so. I will
expand if you have any questions.
2. Is there anything you would like to say,
Mr Hartley?
(Mr Hartley) No. Similarly, I am very happy to
answer questions. Let us do it that way.
Chairman: I know Mr
Dafis wants to begin with some general questions about the energy
sector.
Mr Dafis
3. You have a statement in your memorandum
about the various kinds of impacts that come from various sources
of energy generation and you point out that none of them is without
impact. I was wondering whether you know of any work that has
been done to assess this, to actually create a kind of inventory
across the energy sector of the different kinds of environmental
impacts of production, supply and use?
(Professor Chesshire) I am aware of some work
which maybe I should inform the Clerk or the Committee of in writing,
certainly in the States and in Germany, and also work by a colleague
of mine, Dr Andy Stirling. His work only focuses I think on the
supply side, not on the demand side. One of the difficulties revealed
by such work is that, even the more academic, independent studies
do show a very wide range of impacts. It is not a precise science
by any means. The field is further confused by the fact that much
of the work is indeed sponsored by one or more interests so that,
for example, work on the coal fuel cycle sponsored by the nuclear
industry would lead to one set of conclusions and, conversely,
work looking at the environmental impacts of the nuclear fuel
cycle sponsored by the coal or the gas industry understandably
might reach a different range of conclusions. The problem, methodologically,
as you probably well know, is the apples and pears problem really.
The results are incommensurable, to use the technical term. It
is very difficult to measure air quality impacts and compare those,
for example, with the possible dangers of a nuclear accident or
nuclear waste disposal. Ultimately, although the work can provide
such an inventory and can be a guide to this wide range of impacts
from the energy sector, politicians and policy makers are faced
with two choices. They have to weigh, on the one hand, impacts
such as acidification versus the risks of the nuclear cycle, for
example. I do not think there is any way you can do that quantitatively.
Secondly, of course, when they reach decisions, there will be
a range of non-environmental factors they will want to add into
the equation as well—for example, impacts on employment,
on cost, on competitiveness, possibly on the balance of payments.
It is a very difficult field of research, but I can point up a
number of the particular studies I would recommend, if the Committee
would find that useful.
Chairman: It would
indeed be useful.
Mr Grieve
4. In terms of the nuclear industry, my
recollection—correct me if I have this wrong—from
doing work as a barrister at the Health and Safety Executive and
the Nuclear Inspectorate is that risk analysis is quite well developed
in terms of balancing the benefits of nuclear power generation
and disposal against the potential risks that might come from
it. That aspect seems to have been quite well researched, but
presumably, when it comes to the other areas like coal fired power
stations, because the consequences are probably much broader,
has there been much less of that done?
(Professor Chesshire) As far as I am aware, that
is true. It is not an area where I am particularly specialist
on the coal side.
(Mr Hartley) There have been brave people who
have tried to add up the apples and pears. Needless to say, the
results of their work are not without controversy. There is, for
instance, a government report done by Professor David Pearce called
"The Social Costs of Fuel Cycles", which does attempt
to value all the impacts of the different sources of energy. That
does attempt to rank nuclear, coal and gas and gives what are
called adders, which are additions that you make to the market
price of a particular source of energy in order to allow for the
environmental externalities. Those environmental externalities
are impacts on the physical environment and also impacts on health.
There is an article by my organisation here which I can give to
the Clerk which attempts to draw out some of those adders and
to show how the addition of adders would impact on the choices
of different fuels. Needless to say, coal comes out rather badly
in most of these cases because of the severe impact of acid rain.
Mr Dafis
5. On the question of evaluating the impact,
there surely must be some kind of hierarchy of impacts, must there
not? For example, threat to human life would inevitably be measured
as being more significant than the aesthetic impact of something
which is also brought into the category of environmental effect.
Would it not be the case, that, say, impact on biodiversity, a
threat to the very survival of the species as a result of acidification
or climate change, would also be evaluated as being a deeper environmental
impact? Perhaps the difference might be between ecological impact
and environmental impact in the broader sense which would include
aesthetic landscape value and that kind of thing. Would you agree
that it is reasonable to have that kind of hierarchy and indeed
that it is important to have that kind of hierarchy? Ultimately,
society has to measure the permanent, long term effects on sustainability
of ecosystems and that kind of thing as against convenience, as
against certain aesthetic preferences and so on.
(Professor Chesshire) My personal view is that
one has to express some kind of value judgement as to that weight.
I am not surprised if the human species places very significant
weight on the preservation of the human species, for example,
without being too trite. I think a second dimension to the debate
would be the geographical impact. Is it immediate and very local
like urban air quality, for example, and the incidence of asthma
and so on, which may generate a good deal of public concern and
media interest; as opposed to much longer term, in terms of time,
and more distant impacts for global warming, for example? In the
past, I suppose sulphur dioxide was intermediate to that. As long
as we built tall stacks, it would not fall too much in the UK
and we thought we had solved the problem. Obviously, we became
more enlightened. I guess there could be a hierarchy but it would
require the expression of some value judgments. A second dimension
would be the spatial impact of it. The third dimension would be
the temporal impact of it. Is it fairly immediate? Is it this
side of the election or is it in five generations' time?
(Mr Hartley) I would certainly agree, although
my own view is that it is possible to provide reasonable values
for a large number of the impacts of the different fuel cycles.
There may be some absolute constraints. You may have an absolute
constraint, as you suggest, that biodiversity is so valuable that
you are not willing to jeopardise a particular aspect of biodiversity
at all. In that case, those kinds of constraints, it seems to
me, have to come out of the political process and quite rightly
so. These attempts to add up the apples and pears can never provide
the whole answer. Ultimately, this sort of cost benefit analysis
I think helps decision makers, but does not get you right to the
end. If I can mention one other aspect concerning this business
of measurement, I would imagine that the Committee at some point
would wish perhaps to take evidence from the Office of National
Statistics who of course do produce now a set of environmental
accounts. The impact of energy is quite a central aspect of those
environmental accounts. That is again another means of putting
the impact of the energy sector on the environment as a whole,
and effectively on the economy as a whole also, in a broader context.
6. It may be difficult to give numerical
values to things. I am not saying that we should not try to do
that but it is clearly terribly important that society, when it
comes to a point of decision, is able at least to have in its
mind clearly, or have on a piece of paper in front of it clearly,
a listing of the various kinds of impacts and their extent so
that comparisons can be made and value judgements arrived at.
There is a certain amount of work done on this and more needs
to be done. Is that what you would say?
(Professor Chesshire) I agree with you. It is
a means to the end for more robust public policy making, but I
think it is impossible to envisage the techniques being so developed
that they would avoid this element of choice.
Chairman: That is
probably true of any cost/benefit analysis, is it not? It is actually
a means to help you in arriving at a better informed judgment
which ultimately is probably political, social, etc.
Dr Iddon
7. Are not two other impacts important?
There is the loss of life in harvesting the energy. Obviously,
the coal industry would come out very badly, but there is a difficulty
there, is there not, in that you have to measure it over the same
period of time of activity? We have got better within the coal
industry on health and safety matters. That is the first point.
I am a chemist. I declare an interest. Using coal is using a natural
source of chemicals, as far as I am concerned. Although we do
not have a coal tar industry any more, we could regenerate one.
I am dead against using fossil fuels for that reason. That is
a big impact to me on future generations.
(Mr Hartley) I agree with those points.
Chairman
8. What evidence is there that the Government
is really seized of the need to integrate considerations of the
environment and social issues with economic issues in looking
at energy production and supply? What evidence do we have that
that is something they have really grappled with?
(Professor Chesshire) I would think that there
is less evidence I could draw to the Committee's attention on
the supply side than I might wish. Clearly, they are considered
but I do not think in a very holistic or well documented way.
In terms of energy use, there are two examples I would give. One
is clearly the integrated Transport Policy White Paper which I
have not read in full as yet, but I think there, just from the
buzz words and the media coverage of it, is an attempt to address
some of the social issues, particularly social immobility, access
to mobility and so on, through provision of better public transport,
particularly in rural areas and in urban areas. There are significant
environmental impacts as well by switching modes from private
to public transport, particularly in terms of urban air quality.
Also, it would have a significant impact in terms of road construction
programmes in the future or avoiding those. It obviously has some
significant impact in terms of energy demand because by far the
most rapidly growing sector of demand in the energy sector, as
I am sure you are aware, is the transport sector. That would be
true of incremental emissions as well. If one looked forward to
the period at about 2020, depending on the forecasts used, I guess
between 35 and 45 per cent. of all likely incremental emissions
of carbon dioxide are thought might derive from the transport
sector unless policy action is taken, so transport is one, I think.
The second would be rather imperfect exercises to build a jigsaw
in the area of energy use in homes. There is a major issue of
fuel poverty, of widening tariff differentials, as we have seen
with the process of gas liberalisation. We are aware that the
poor, for example, and the elderly spend a much more significant
proportion of their income on heating—15 per cent; maybe
20 per cent—in the coldest quarter of the year compared
with my own household.
9. 20 per cent. of their income?
(Professor Chesshire) Their disposable income,
yes. They are living in very draughty properties, very badly insulated
properties, both in the public and in the private sector. I think
these initiatives to release capital for refurbishment programmes
are to be welcomed. Of course, not all that money will go on energy
related aspects, but a good deal of it would do in terms of tightness
of the roof space, windows, doors and so on. Those are two areas.
On the supply side, it is more difficult to think of a good example
where all those different facets have been thoroughly integrated.
(Mr Hartley) It seems to me that the setting for
policy has to be the starting point. It is widely agreed I think
that a market based approach to energy choices is likely to lead
to a better set of choices than one based upon planning. One has
seen that support for liberalisation in energy markets followed
through with the change of government. At the same time, while
markets can make very good choices if there are no severe environmental
impacts, when there are severe environmental impacts of course
there is certainly a role for government. There can be no doubt
that, for a long time now, energy choices have been constrained
by external decisions taken both within this country by, say,
the Environment Agency, and also externally, decisions taken by
the European Union in relation to acid rain or the UNECE in relation
to acid rain. Inevitably, governments, it seems to me, although
they may be pursuing essentially market based energy policies,
have had perforce to take account of environmental constraints.
I have heard it said at certain points that there is no such thing
as an energy policy any more, effectively energy policy is just
an aspect of environmental policy. I do not believe that. If you
look at the recent review of energy policy, that raises quite
a lot of concerns which are independent of the environmental constraints.
Inevitably, I think those environmental constraints have been
there; they have been taken into account and I would have thought
that they seem to me to be pretty much embodied in government
thinking. It seems to me that the Department of Trade and Industry,
responsible for energy policy, is pretty aware of how much environmental
constraints are important to its job. Similarly, the Department
of the Environment, Transport and the Regions is again pretty
much aware of how much it has to keep in touch with energy policy.
The two seem to me to be working better together than I have seen
for a long time.
10. Would you say that, for example, from
the point of view of the ordinary consumer of energy, there is
any marked change over, let us say, the last five years, in the
choices they are confronted with?
(Professor Chesshire) Progressively, obviously,
since the early 1970s, there has been a very significant move
to natural gas, if you are thinking in terms of energy use in
the home, and where natural gas has been available it has been
the fuel of choice. Secondly, you have had some significant increase
in electricity use, particularly in rural areas of course where
a gas supply is not available. One has seen the use of electricity
and gas backing out that of coal and of oil quite significantly
and progressively. I do not think the environment per se was an
important consideration in that range of choices because it predates
the recent heightened concern about the environment. In certain
areas, for example, in Northern Ireland, where natural gas was
not available, the importation of piped natural gas supply to
Northern Ireland has become quite significant in environmental
terms. There were a lot of air quality problems in Belfast linked
to power generation, so the first use of the gas pipe there was
to convert Ballylumford from oil to gas. They are now extending
a piped natural gas system into the Belfast area and perhaps more
widely in the long term. There is a specific example where maybe
some specific environmental benefits derive from the switch. In
many urban areas the possibility for using coal no longer exists.
Many fireplaces have been blocked out. Many modern homes do not
have fireplaces. In some senses the choices have been made by
the planners, by the building designers and by the housing market.
Chairman: Can we look
at some of the current government reviews, of which there are
a great many going on? Take, for example, the North Sea fiscal
regime. I know Mr Blizzard wants to ask you about that.
Mr Blizzard
11. We have this review going on. I believe
a consultation paper from the Government is imminent. What do
you think are the environmental issues in this review of the fiscal
regime?
(Mr Hartley) I am no great expert on this. It
is clear that independent of that review there are some quite
welcome developments in the way in which the UKCS, the UK Continental
Shelf, is being regulated. Certainly for the first time there
is now going to be a requirement for a full environmental impact
assessment of new developments in the North Sea which seems to
me to be wholly welcome. At the same time, the Marshall Task Force
is looking at the possibilities for either taxing or imposing
a system of tradeable permits on carbon dioxide emissions. Although
that is established I think with a framework looking mainly at
the onshore industry, it has implications, it seems to me, for
offshore as well. Clearly, the offshore industries are responsible
for quite significant impacts of greenhouse gases, both carbon
dioxide and methane. I would be looking I think for some sort
of development of the Marshall principles to make sure that, where
possible, the offshore industry was allowed some freedom in terms
of making some market choices about how it might respond to more
rigorous regulation of emissions of greenhouse gases. If that
is the case, any development of that kind needs to be squared
with whatever proposals are made for the UKCS fiscal regime. I
think there is a start of a welcome focussing on the environmental
impact of the offshore industries, but for quite how it will play
out, I think we have to wait and see what the document produced
by the Government after their review looks like.
12. The broad issue is about whether one
taxes the exploration and production industry, the upstream part
of the business, more. At the moment, the tax regime is very benign
in comparison to other places in the world. Industry then makes
the case that the costs are higher and so on, but it is a question
of whether one taxes the industry more and perhaps risks less
investment or it winding down earlier, or whether one continues
with the tax regime that has allowed it to actually extend its
life.
(Professor Chesshire) I am not an offshore tax
specialist either. There are comparatively few of them in academic
life. I think they make a fortune elsewhere. There are some important
considerations. Clearly, the Treasury would have begun this review
of the offshore fiscal regime when the oil price was at or about
$20 a barrel, as it was at the time of the Kyoto conference, for
example. Obviously this year it has plummeted down to $13 a barrel,
so that has reduced the profitability in the North Sea and, all
other things being equal, would slow down investment intentions
in the oil sector. That is one impact. Secondly, there is the
change in the decommissioning environment anticipated in the North
Sea with the presumption in favour now of dismantlement onshore.
That will significantly add to costs. I would think probably factor
three, something of that order. I have not the exact figures,
but I understand it could increase the energy costs, for example,
of the process by about factor five. There clearly are some costs
and some indirect environmental impacts, whatever benefits there
might be to the fishing industries and others in bringing their
structures ashore. Then of course one has the changes proposed
in the fiscal regime itself. I would guess, if that is not handled
fairly sensitively in relation to both of those, both the lower
revenues from the lower oil prices and the higher costs associated
with the presumption in favour of onshore dismantlement, then
you cannot squeeze a lemon too many times before the pips squeak.
The final point I would make is that, given the tax regime offshore,
a lot of the costs associated with dismantlement and decommissioning
will in fact be borne by the taxpayer because they will be offset
against future tax liabilities. In a sense, there is an element
of burden sharing between the oil companies, the taxpayer and
the Government following this decision in favour of greater onshore
dismantlement. Those are the sensitivities: the reduction in the
oil price; the fact that over the next ten years, particularly
starting fairly quickly, they will face very significantly higher
costs. The final point I would make is what the adequacy of the
decommissioning reserves will be in the light of the change in
policy. The oil companies put very careful provisions for decommissioning
in place under their production agreements. I would imagine those
would have been based on the previous policy towards decommissioning,
a case by case assessment, but an expectation that many of the
structures would be toppled at sea. If they are going to be brought
ashore, it may mean that those decommissioning provisions are
not as generous as one might wish them to be. Some of the fields
will only have a few more years of production ahead of them, so
it is a bit like the problem with the nuclear liabilities in the
case of the Magnox stations where you had insufficient reactor
life in that case to accumulate adequate provisions. Those are
some of the factors I would want to look at very carefully when
the Treasury does publish this long awaited document.
13. Before we move on, can I just put a
case to you that focuses very much on the environmental aspects?
If we were to go back, say, 10 or 12 years, they were then saying
that by now the industry would be starting to wind down in the
sense that the major reserves of oil and particularly of gas in
particular fields would have become exhausted and it would have
been uneconomic to pursue those fields. In the last 10 years,
we have seen massive developments in new technology that have
enabled what I have called the small puddles of gas that are there
to be extracted with the use of new drilling techniques and the
like. This has only been possible given the benign tax regime,
because it is more expensive to start drilling every which way
and taking out the small puddles. Is it not good environmental
management, once one has set up a field and set up a platform,
to then drill off in all directions, often for several kilometres
off a platform, if you like, to take out all the available gas,
rather than just leave it behind, which has an element of being
wasteful, having invested and left something behind which is now
extractable. Is there an environmental case for having a tax regime
that would enable finite resources to be taken out while the infrastructure
is there?
(Professor Chesshire) I agree with much of that.
The impact of technological change, as you say, has been quite
dramatic. Most industry assessments argue that the costs of producing
a barrel of oil or a million cubic metres of gas or whatever have
probably halved over the last decade due to lighter offshore structures.
There is less metal being assembled and moved offshore. Deviation
drilling means you can reach a much wider reserve base from one
rig than was true in the past. There have been a lot of developments
in the IT area as well in terms of rig design, in terms of 3D
seismic, so that one has better estimation of the location and
the size of reserves and configuration of the reservoir and so
on. There have been developments in terms of subsea systems as
well, so that more of the heavy equipment is placed on the sea
bed rather than on top of the rig, so a whole collection of technologies
which have reduced costs. Therefore, although prices have fallen
in real terms, we have increased the economically profitable reserves
to be exploited. I think it is a very interesting issue as to
what drives that technological change. If the tax environment
is fairly generous, does that mean they have a lot of money to
set aside to blue skies R&D internally, in their laboratories?
Will that stimulate technology? If you squeeze them hard and reduce
their profitability, do they say, "My God, we have got to
do something about our cost base"? Is the glass half empty
or is it half full? I would want to talk to the industry to get
some sense of what drives them in this area. It will be technology
which increases the scope for recovery from those reservoirs.
It will not be the tax regime; it will be the technology which
permits you to increase recovery rates, so I would want to see
what drives that technology in the industry.
Chairman
14. Is it not very often the case that costs
follow prices down? Costs reductions follow price pressure, and
certainly in other extraction industries—minerals and metals
and so forth—you have found that all sorts of resources
have been brought into play as prices have been forced down.
(Professor Chesshire) That is the historic experience,
yes.
15. The tax regime has been almost irrelevant
to that. It has been the profitability of the industry which has——?
(Professor Chesshire) Yes, but the tax regime
at the margin. If you have very much lower prices, you have to
accumulate much higher decommissioning provisions and you are
facing a higher tax bill. You are going to have to squeeze them
pretty hard, but I agree with you. Generally, I would expect the
search for profits as prices fall concentrates the corporate mind.
Mr Blizzard
16. But is there another point there? Oil
companies do not essentially go prospecting for gas. They go prospecting
for oil. If they find gas instead of oil, yes, they have got something;
it is not a dry well, but they are not primarily looking for gas;
they really go looking for oil, so there are other places in the
world where the oil is just leaking out at the surface and is
much cheaper than sending your drill five kilometres off a platform
to get a little bit more out. I am just putting a case that has
been put to me. I am interested in your response to it, as to
whether it stands up or not, because one is always looking for
independent verification or rebuttal.
(Mr Hartley) The extent to which companies are
obliged to exploit the gas which is found alongside the oil is
something that is already heavily regulated. The DTI is quite
strict in the rules that it applies. It does ensure, so far as
possible, that gas in those circumstances is not wasted, that
it finds a way to a gas pipe and back to the UK. This whole question
of what the environmental attitude to the exploitation of those
fossil resources should be is quite an interesting one. There
have been people who would wish to slow down the rate of depletion
in the UKCS in order to preserve a resource for future use. It
seems to me that in general markets make better choices about
the rate of depletion than governments, so I suppose to that extent
that says that you want to make sure that the tax regime allows
markets to make those choices as freely as possible.
Mr Thomas
17. I wanted to ask about new and renewable
energy in particular. I was slightly surprised by your comment
that markets on their own are good judges of the rate of depletion.
Obviously, if one left the market to decide how much energy to
extract from renewable energy at the moment, it would perhaps
remain at a relatively low level. Could you say something about
the target of 10 per cent, whether you think that is sufficient,
and what other market mechanisms you think might be needed to
encourage the uptake of renewable energy?
(Professor Chesshire) The UK's 10 per cent. target
for renewables as part of the electricity generating mix is a
much more realistic target than the 12 per cent. of the total
EU energy balance which the European Union has set in its White
Paper. We need to walk before we run in terms of setting expectations
and targets. From the point of view of those who are more expert
in the renewables field than I am, it does seem to be a realistic
target. One of my colleagues, Catherine Mitchell, gave evidence
to the Trade and Industry Committee hearings on renewables, for
example, and her evidence in that inquiry is of great interest
if you are interested in that particular aspect of it. My own
view is that the non-fossil fuel obligation and the fossil fuel
levy in the environment have been absolutely crucial in stimulating
the market and in stimulating technological change as well. There
has been, for example, a reduction in the costs of wind power
between NFFO1 to NFFO4 from about 11p per kilowatt hour down to
about 3.5p per kilowatt hour, so roughly a two-thirds reduction
in cost, with some further reduction expected. If one were to
look at the average of the basket of all of the renewable technology
sponsored under the various schemes, their costs have halved between
NFFO1 and NFFO4. There is evidence of increasing market maturity
and of very considerable learning too. I do not think all of the
technological innovation explains that. I think other things are
learning by local planning officers, for example, and the legal
profession and all those involved in the software side of it.
However, the view is that the pool price at the moment is probably
higher than it needs to be, of the order of 25 per cent. The most
cost effective of the renewables are generating at about 3.5p
a kilowatt hour, which is roughly the average price paid by a
regional electricity company. The pool price is down at about
2.3p or 2.4p, so there is some margin there. The renewables industry
lobby would argue that one needs to add in some other factors
to level that up. One is environmental benefits of course from
the renewables. Secondly, should they be allocated some kind of
diversity premium, or whatever one calls it, as one increases
the range of technologies in the generation mix, and thirdly,
in terms of stimulating new technology, regional development,
in some cases offsetting losses on the transmission system, because
a lot of these are locally embedded in the system. When one adds
in other factors such as that, the gap closes quite considerably.
The final point I would make is that there are a number of other
market based means of stimulating demand for renewables and generation
through, for example, green electricity tariffs. A number of the
regional electricity companies have introduced those, I think
Eastern and South West as well. I have not seen any data for market
takeup yet. I do not know how popular those have proved, but I
am quite encouraged by the progress and learning that has occurred
in the UK over the last eight years under the NFFO.
18. Before Mr Hartley comes in, can I suggest
to you the line that has been advanced to me by Greenpeace, that
the 10 per cent. target is not ambitious enough and that there
are countries that are already achieving that type of target with
wind power alone? Is that a view you would share or disagree with?
(Professor Chesshire) Target setting is gamesmanship,
in my view. Perhaps I should not say that here. Does the Tower
await me? There is an element of gamesmanship and outpacing each
other by saying, "My target is more impressive than your
target". I would rather see progress. I am one of those rather
boring people who likes to look at the other end of the telescope
and say, "What progress is being made?" and, in the
light of that assessment of progress, to revise the target if
need be. 2010 is 12 years away. We have learned an awful lot in
eight years, as I have just suggested to the Committee. By all
means review it in five years' time, if it is looking easy to
achieve and not very demanding. One does want to stimulate the
market, customer demand, industry thinking, technological change.
By all means tighten it but why tighten it so far away from when
it applies?
Mr Dafis
19. It might be because of certain imperatives
like climate change. That is an enormous reality whose implications
we are only beginning to come to terms with and they might be
greater than we know about. In those circumstances, it might be
appropriate to say that this is an imperative; we have to respond
to it. We have to respond to it by changing the mix of energy
generating methods and we have to change those so as to achieve
a certain amount of reduction of CO2 and there is your target.
Then your target drives the technological change that drives the
policy measures that are aimed at achieving the target which is
the reflection of the imperative. It is not merely gamesmanship,
is it? There may be an element of that but it is not merely that.
It is much more serious than that. That is why we have people
like Prescott saying that he is committed to the principle of
target setting as a driver of policy change.
(Professor Chesshire) That is fair. If you just
set the target independently of that wider set of considerations,
if you develop the climate change response strategy which examines
the issues you discuss and begins to allocate the burden of sharing
by sector within power generation, within transport, industry
and housing, within power station then it begins to map out. We
have a design path as seen now. I agree with you, but just plucking
a number from the air in the absence of any wider assessment is
very dangerous. If, as a result of a very detailed assessment
of the climate change response strategy, it becomes clear that
the Government would wish to see that expanded to 15 per cent,
yes, in that context, I would agree with you, but just plucking
a number from the air without identifying the measures which are
going to be put in place to help achieve it, I think, is not very
sensible.
(Mr Hartley) Can I start by dealing with the question
of as it were what markets can do and what markets cannot do.
I would certainly not suggest that markets can do everything.
The statement that I made initially was related to choices about
the exploitation of oil and gas, and there it does seem to me
that governments would have made very big mistakes 20 years ago
if they had listened to environmentalists and believed that we
would be completely out of oil and gas by now, which was the kind
of scare story which was being spread around 20-25 years ago.
In those circumstances I believe markets do generally make better
decisions, but of course markets are not good at dealing with
environmental constraints, but neither are they necessarily very
good at dealing with future policy constraints and that is of
course where government must come in and direct markets. That
is precisely why it is important that Government does come in
and protect what, I would hope, are infant industries. I would
hope that the renewable industries will eventually be able to
make their way without the special arrangements of an NFFO. Certainly,
as Professor Chesshire has said, they have been doing very well
on that score. I think it is also important to think as it were
what the overall context is likely to be in terms of taxes. Again
I return to the Marshall Committee. If one has a system where
industry is paying carbon taxes or energy taxes related to the
environmental impact of their use of energy, or perhaps if one
has a system of tradeable permits, so again industries who emit
large amounts of CO2 have either to buy permits to
deal with that or possibly to finance renewable energy as a means
of making sure that they have done their share of reducing emissions
of CO2, that is precisely the kind of area where Government
intervention is needed and is the hope for the future, the hope
for the renewables. So far as the target is concerned my view
would be that we are remarkably near to 2010, given the kind of
planning horizons which are necessary in the energy area. It seems
to me that the existing target is a very substantial target. If
it proves to be the case that the industry can easily meet it,
if, as Professor Chesshire says, five years on we see that things
are much easier than perhaps we now anticipate, then fine, but
I would have thought that the target is a very challenging one
rather than the reverse.
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