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 thatit 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
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.