Select Committee on Science and Technology Appendices to the Minutes of Evidence


APPENDIX 21

Memorandum submitted by the Royal Society

  We believe that crucial to slowing down the rate of global climate change is the need to reduce anthropogenic emissions of greenhouse gases into the atmosphere—notably carbon dioxide. Reducing the use of fossil fuel and replacing it by non-fossil alternatives is clearly a desirable aim. The problem is that most of the alternative forms of energy cannot compete with the cheapest fossil fuel—currently natural gas—particularly when the latter's costs are not yet internalised. Although governments can reduce these emissions by advocacy and by regulation, economic analysis shows convincingly that placing primary emphasis on the use of economic instruments provides the most cost-effective route for such emission reduction. We believe that there are two generic types of economic instrument that could provide the most effective solution to rising CO2 emissions: a carbon tax imposed on all carbon dioxide emissions and the allocation of tradable emission permits.

  The primary aim of a policy based on the application of either economic instrument is to correct the failure in the market, which at present makes emission of carbon dioxide cost free. An economic instrument will associate a cost with the emission. The effect will be to make fossil fuels more expensive for the consumer thereby encouraging switching to lower carbon technologies and energy sources, and reducing consumption through conservation and efficiency. At the same time it makes renewables, nuclear and carbon sequestration more viable. These latter influences may turn out to be of equal or even greater importance.

  We recommend that the economic instrument should eventually be applied to all sources of emitted CO2—industrial, domestic, transport (including aviation). We believe the Climate Change Levy, in its present form, is an inefficient means of reducing CO2 emissions primarily because it excludes certain energy users (including households and transport) and targets energy use in general rather than carbon emissions in particular. It also acts somewhat crudely on the demand for energy, but fails to provide anything significant for the supply side of the equation.

  Concern has been expressed that either economic instrument would have a negative impact on the economy. However, both a carbon tax and auctioned emission permits produce substantial revenues. Economic modelling demonstrates that if these revenues are optimally recycled, the overall cost to the national economy—to the Gross Domestic Product (GDP)—would be modest even for the very large reduction of emissions, which are likely to be required beyond 2012 (the Kyoto period). Indeed some studies suggest that the effect may be positive. We hope that the recognition of these facts will facilitate the eventual achievement of international harmonisation.

  While the total change in GDP may be modest the impact on individual sectors of the economy will be substantial. Some sectors such as the renewable energy industries will see benefit as a result of their low carbon contents and from the availability of financial and other resources that would otherwise have been taken up in fossil fuel production. Industries whose energy costs amount to a large percentage of the total will face particular challenges. The coal and (in the long term) perhaps the oil industries are expected to lose substantial proportions of their outputs depending on how quickly new technologies such as CO2 sequestration or in-situ gasification develop. However, we recommend that any measure to shield such carbon-intensive industries from the impact of the tax should be time-limited, and should be transparent in the form of explicit subsidies. The tax is intended to increase the price of carbon-intensive products.

  As with any economic instrument or regulation, it is crucial that industry is given time to adjust. In the case of a carbon tax it implies that it should start at a low level, and with some indication by government on the probable profile of future increases. For tradable permits, there is a case for initiating the scheme by grandfathering—ie allocating permits free of charge to individual companies reflecting their past emission records. However, we recommend that this stage should be strictly time limited, with the aim of proceeding to a wholly auctioned permit.

  Since global climate change affects all nations, one needs to seek solutions which will ultimately achieve agreement with as many other nations as possible. Enlarging the number of countries imposing a carbon tax or participating in a tradable permit scheme reduces the required rate of tax or cost of permit, lowers costs and lessens any loss of price competitiveness. The chosen economic instrument should aim for convergence with the nations of the EU—and beyond. We do not underestimate the enormous problems in reaching the needed international agreements. However, a vital first step is to seek and reach an understanding in principle—that emission control would in future be based on the application of a carbon tax or related economic instrument.

  Reaching an agreement on as wide an international basis as possible is more important than the speed with which a fully-fledged scheme is implemented. In considering an appropriate economic instrument both nationally and internationally it is vital to give due weight to the need for simplicity and transparency. Ultimately it is society at large that has to be convinced. A scheme which is beyond the comprehension of most, will fail in both of these respects. Ultimately nations will have to agree but it is not inevitable that they adopt the remedies at the same rate. What is essential is agreement of a principle and agreement to converge to a solution—even if the convergence is only achieved with a decade or more of delay. We take some hope from the Kyoto Protocol, which provides a framework for international agreement and mechanisms for emissions trading.

  In addition to this letter I would like to draw your attention to the Royal Society's response to the PIU Energy Project scoping which provides an additional overview of our position on Energy Policy and has a specific section on research and development, which I have reproduced below.

RESEARCH AND DEVELOPMENT

  There is a need for sufficient levels of funding of research and development to ensure sustained growth of energy technologies, particularly those associated with renewable energy and carbon sequestration. The correct balance will depend on the technology in question. Wind turbines, for example, no longer require core research funding but do require investment in development to reduce manufacturing, production and installation costs. They also need funding for demonstrators for large off-shore installations. Much of the necessary research and development must be done in collaboration with other countries. It is not feasible for the UK to work in isolation in areas such as the development of designs of new nuclear power stations or large-scale carbon sequestration. We have previously advocated the establishment of an international body funded by contributions from individual nations. We do not envisage the establishment of a new research institution, rather an international fund for energy research and development where industry and academia could obtain funding to carry out a co-ordinated research programme.

30 September 2002



 
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