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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