Select Committee on Environmental Audit Minutes of Evidence

Examination of Witness (Questions 109-119)

Wednesday 4 June 2003


  Q109  Chairman: Mr Pearce, I am sorry to keep you waiting. That is the way of the House of Commons but we are now a quorum and therefore we might as well begin, if that is convenient to you?

  Mr Pearce: Yes, it is, and good afternoon, Chairman. Thank you very much indeed.

  Chairman: Thank you for your very interesting memorandum, which is really a good read and posed some very interesting questions, apart from answering some. I will ask Mr Ainsworth to start off.

  Q110  Mr Ainsworth: Thank you, Chairman. It was an interesting read and raises interesting philosophical points, I think, about the value of monetising things which are very difficult to monetise and it is a consistent thread running through your submission that this process of monetisation focuses inevitably mainly on marginal aspects of change. Is not the fact that it has real difficulty in embracing the big picture a fundamental problem about the whole system of monetisation and its usefulness?

  Mr Pearce: I think it is very important to recognise what the economic valuation of the environmental costs is doing. It is measuring the economic efficiency; it says nothing about any equity or fairness or indeed sustainability aspects of aviation. So I think when one is making a policy decision one needs to use these valuations in the right context. I think it does give very useful information and enable you to compare the economic benefits of increased aviation capacity on the same metric as the environmental cost to give some idea of what the overall impact would be in terms of economic efficiency, in terms of whether the people benefiting outweigh the number of people suffering in terms of their preferences. But as I say, it says nothing about any distributional or fairness issues you might want to consider.

  Q111  Mr Ainsworth: But neither does it factor in low risk but potentially catastrophic events, such as say a change in the Gulf Stream. Is it not a real problem that it misses what may be the whole point?

  Mr Pearce: Well, I would not say it was a problem with it. I think it is a problem if those valuation numbers were the only basis of your decision. So I think alongside the monetary valuation figures when assessing costs and benefits there do need to be non-monetary indicators, qualitative indicators, which would include some of the, as you say, potentially catastrophic events from climate change, about which we have no idea of their probability. They are impossible to incorporate in valuation numbers because we do not know the likelihood of these events happening. But if you are adopting a precautionary approach one would want to take those uncertainties, those events into account but alongside the monetary valuations. I think that is the important point.

  Q112  Mr Ainsworth: I suppose what I am getting at is that there are things which do not have a monetary valuation put on them simply because they seem to be a long way away. If we were all told that the end of the world was going to happen at the end of this week we would probably pay quite a lot of money to try and prevent that from happening. The fact that it may happen in 300 years' time seems to be a disincentive to persuade people to do the right thing. Should that time difference really be part of the equation and does not the fact that it is not an integral part of the way that these issues are thought about undermine the process?

  Mr Pearce: I think there is a very important point that the discounting of the benefits as well as the costs means that—it depends on the discount rate one uses but if you are using a discount rate of 6%, which is the standard rate used by the Treasury, that means that after 15 years or so any adverse impact on the environment makes no difference to the calculation. I know that the Treasury have more recently recommended un-bundling that discount rate, which may enable a lower rate to be used and so effects more distant to be taken into account, but I think there is still a fundamental point that what you are measuring are the preferences of the population today for actions which reduce or not environmental impacts in the future; you are not necessarily taking into account the preferences of the people who are going to be suffering from say climate change 50 years or 100 years hence.

  Q113  Mr Ainsworth: So you are not taking into account the total environmental cost, are you?

  Mr Pearce: Not in the sense of the cost on future generations, that is correct.

  Q114  Mr Ainsworth: I am sorry to keep on about this but your paper makes it clear that you regard this as a weakness and yet you also seem to imply that using this system with its weaknesses is the only system around; it is the only show in town. Is that right?

  Mr Pearce: I think that using the monetary valuations should be part of the decision-making process. It should be one of the pieces of information used when making the decisions. Policy makers may consider that they ought to be taking into account the value, the preferences, the impacts on those future generations as well as the current population who are voting for them at the moment. In some sense the numbers do reflect a concern for one's children and one's grandchildren and concerns for future generations because we do have those concerns, but that does not necessarily mean that they will fully reflect what people will want in terms of a stable climate in 50 or 100 years' time.

  Q115  Mr Ainsworth: So those concerns, which many of us I think would think are very important ones, are not reflected in the £1.4 billion?

  Mr Pearce: No.

  Mr Ainsworth: Thank you very much.

  Q116  Mrs Clark: Could I just press you a little on what you actually raised in terms of Mr Ainsworth's questioning. You mentioned people's preferences and I would like to take you a little further down that road. Obviously people's preferences on anything are expressed today, at this moment in time, and I am jolly sure that on a whole range of issues what we value and prefer today is very, very different from say what we preferred in the 1960s. Obviously people's preferences are going to change quite dramatically, I would have thought, in the next 30, 40 or 50 years if, for example, the effects of global warming and perhaps the loss of biodiversity become more pronounced. I am very uncertain as to whether current approaches to monetisation actually take this into account. Do they, and should they?

  Mr Pearce: They certainly do not take into account changing values. In principle the people who are surveyed in measurements of this kind can express their preference for preserving biodiversity or preserving a stable climate by avoiding climate change, but I think there is an issue of principle as to whether people are fully informed about that to the extent that as more information comes along they may change their preferences, their values and their thoughts about the relative importance of these issues compared to other uses for their money and resources.

  Q117  Mrs Clark: So obviously the way that we are approaching it at the moment is a sort of snapshot approach, is it not?

  Mr Pearce: Yes.

  Q118  Mrs Clark: Which again would lead to underestimating the true environmental cost?

  Mr Pearce: It certainly is a snapshot approach, as an election is a snapshot approach, as a market for cars or tomatoes is a snapshot of people's values at the moment. Monetary valuation attempts to mimic the actions of a real market to get the value of it. Yes, you are right, values may well be different in the future but I do not know that we can predict exactly how they would change.

  Q119  Mrs Clark: It is not just values in this country, is it, in say 30 or 40 years' time when we have agreed and established that those values and preferences may be very, very different but also what about at this moment in time but actually not in the UK, perhaps in a third world country? Surely they might have very, very different value scales and preferences?

  Mr Pearce: Yes.

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