House of Commons - Environmental Audit

Select Committee on Environmental Audit Seventh Report

Appraisal and regulation

40. In 1997, as part of the new Government's commitment to sustainable development, the Prime Minister stated that "Environmental must be integrated into all our decisions…..They must be in at the start, not bolted on later."[31] Indeed, mainstreaming environmental objectives within policy appraisal is of crucial importance if we are to make progress towards sustainable development, and it is therefore an issue which the EAC has pursued in various contexts since 1998.

41. Over the last four years, the focus has shifted from separate environmental appraisals to an emphasis on integrated policy appraisals. In April 2004, the Government moved beyond this and announced that Regulatory Impact Assessments should constitute the formal means for assessing environmental impacts. We therefore decided to examine the adequacy of the current approach to appraisal, in particular the reliance on Regulatory Impact Assessments, as a vehicle for capturing all environmental costs and benefits and for balancing these against economic and social impacts. We felt such a review was particularly apposite since this shift has occurred at precisely the same time as the Government has been placing renewed emphasis on deregulation through the creation of the Prime Minister's Panel for Regulatory Accountability.

The shift to RIAs

42. In 1999, the Government committed itself, in response to an EAC recommendation, to publishing all free-standing environmental appraisals. The following year, the Second Annual Report of the Green Ministers Committee required all departments to screen policies for environmental impacts, maintain a central list of such screenings, and carry out environmental appraisals where the results of the screening required it. We welcomed this commitment. However, as we have documented elsewhere, little progress was actually made.[32] Few departments other than DETR (subsequently DEFRA) conducted any environmental appraisals, while most departments were clearly flouting the requirement to maintain a central list of screenings and abide by the requirement contained in the Cabinet Office's Policy Makers Checklist.

43. Indeed, even the Government itself acknowledged that most departments were not fulfilling appraisal requirements in this respect. The 2001 Green Ministers Report stated that "it is somewhat disappointing that, despite promotion of environmental appraisal, inclusion in the Policy Makers Checklist and screening systems put in place by departments, relatively few departments beyond DETR have produced published environmental appraisals." It also stated that: "It is possible that departments are making progress, and building environmental considerations into other appraisals, but the extent to which this is happening is not clear." It went on to make the following commitment: "The reasons for the apparent lack of progress on environmental appraisal will be investigated as part of a review of progress with development of integrated appraisal systems in the next year." This commitment was, however, never adequately fulfilled. Nor has the situation improved since then, and we have continued to point out important failures—for example, in respect of housing and aviation policy. Other organisations have reflected our concern: in their evidence to us, the CPRE for example cited the Government's failure to produce a sustainability or environmental appraisal prior to the publication of the Communities Plan 2003.[33]

44. Having failed to get departments to carry out separate environmental appraisals, the Government instead suggested that the emphasis was increasingly moving towards Integrated Policy Appraisal (IPA). In the context of a total lack of clarity as to where policy responsibility for this lay (whether it was with DEFRA or the Cabinet Office), DEFRA began to develop and pilot with some other departments an Integrated Policy Appraisal tool—though the "tool" was little more than a reminder to departmental staff to consider and, where relevant, carry out various other forms of appraisal. Moreover, as the flimsy environmental appraisal contained in the IPA of the Air Transport White Paper demonstrated, the use of such a "tool" will not of itself bring results: the quality of the product depends on the depth of the analysis undertaken.[34]

45. Finally, in the context of the need—which we ourselves first highlighted—to rationalise the plethora of guidance which was available on appraisal, in April 2004 the Government merged the IPA approach into the Regulatory Impact Assessment.[35] The RIA process has therefore become the primary and indeed only vehicle for assessing environmental alongside social and economic impacts. In commenting on this shift to RIAs, the Cabinet Office stated in its memorandum: "In addition, with the IPA being voluntarily taken up by certain departments, there was no central requirement for policy makers to look at wider impacts, including environmental impacts. These issues restricted the take-up of tools to appraise environmental impacts." [36] We find this comment astonishing as it appears to display no knowledge of previous Government commitments and requirements in this respect. And if it were true, it would constitute an admission that the Government had made no progress in greening policy-making procedures from 1997 to 2004.

46. The shift to Regulatory Impact Assessments (RIAs) as the primary method of evaluating environmental, alongside social and economic, impacts has occurred in the context of a failure by departments to fulfil adequately previous requirements relating to screening and environmental appraisal. This is disappointing. We are also astonished that the Cabinet Office should claim that—until the incorporation of environmental impacts within the RIA procedures in April 2004—there was no central requirement for policy makers to look at wider impacts, including environmental impacts. If true, this would constitute an admission that the Government had made no progress in greening policy making procedures from 1997 to 2004.

Critique of the RIA guidance

47. Given the central importance which RIAs now play in the policy making process, it seemed to us important to examine the guidance available. We note that the Cabinet Office has not in fact republished the guidance despite the important changes in April 2004 when environmental issues were incorporated within the RIA process. Instead, the Cabinet Office has relied on the web-based version which has been updated to reflect this change, and our comments below are based on that version as at March 2005.[37]

48. The RIA guidance is written throughout from the point of view of minimising regulation, as regulation is seen in a negative light as something which puts burdens on business. In this respect, RIAs betray their historical origins—as they are developed from the Compliance Cost Assessment introduced in the early 1990s as a means of identifying the likely financial burdens of regulation on business and other sectors. There is no recognition anywhere in the guidance, as far as we can tell, of the huge positive role which regulation has played in delivering environmental and social improvements.

49. Reflecting its origins and primary purpose, the RIA contains various requirements such as the need to take account of small businesses (the small business test), equity and fairness considerations, and competitiveness issues (the competition assessment). Indeed, specific consideration has to be given to each of these—as is reflected by the high-level headings specified in the RIA template (see opposite). By contrast, environmental issues receive no specific consideration at the same level, but may only be considered within the sections on benefits and costs. The net result is that the RIA is not clearly structured at a high level into economic, social and environmental impacts in the way integrated policy appraisal was intended to promote.

Initial / Partial / Final RIA Template

1. Title of Proposal

2. Purpose and intended effect of measure

3. Options

4. Benefits

5. Costs

6. Equity and Fairness

7. Consultation with small business: the Small Firms' Impact Test

8. Competition Assessment

9. Enforcement and Sanctions

10. Monitoring and Review

11. Consultation

12. Summary and Recommendation

13. Ministerial Declaration

50. In the two sections on costs and benefits, departments are encouraged to analyse environmental, social and economic impacts separately. These two sections are, however, distinct from each other, and it is therefore unclear how costs and benefits are to be balanced against each other—particularly if they cannot be quantified. As the Aviation RIA demonstrates, they are also primarily narratival and discursive in nature (though they may include extensive statistics and financial costs)—and this does not help a decision-maker in trying to balance environmental considerations against economic and social ones. Indeed, to the extent that environmental impacts may be more one-sided (ie costs rather than benefits), they may only appear in one section rather than both and for that reason receive less coverage than economic or social impacts.

51. Moreover, while the guidance suggests that a summary table might be included (within section 12), wide discretion is accorded to departments as demonstrated by the following quote: "It is helpful to summarise the costs and benefits of each option in a summary table. Regardless of the nature of the cost and benefit, for example if they are short term or long term, direct, indirect, the result of dynamic long-run impacts, unintended consequences or transfers, they can all simply be called "costs" and "benefits" in a summary table, although it might be useful where relevant to indicate whether they are economic, environmental or social." The concept of aggregating in financial terms all costs and benefits together—whether environmental, social or economic—demonstrates the extent to which the RIA process totally misses the fundamental point of integrated policy appraisal —which was to provide a vehicle for decision makers to balance environmental considerations against social and economic ones.

52. In these important respects, the formal structure of the RIA is far weaker than, for example, the single-page Summary Appraisal Tables which were developed in DETR in the late 1990s as part of its New Approach To Appraisal (NATA). The latter were developed specifically to enable policy makers to assess, on a single side of A4, a summary of all the impacts of a proposal and enable them to come to a decision about the balance to be struck between environmental, social and economic objectives. They also included a break-down of environmental impacts into a number of different categories (eg climate change, biodiversity, landscape), but they did not attempt to provide monetary valuations and simply rated the impacts on a seven point scale.

53. Moreover, as we argue below, we believe that the emphasis throughout the RIA guidance (and indeed the Cabinet Office memorandum[38]) on quantifying in monetary terms environmental impacts is fundamentally mistaken and fails to take account of the overriding need to meet environmental policy objectives. Indeed, we would be interested to see how the Government's decision in 2000 to procure timber only from sustainable sources could have been justified within the framework of the current RIA guidance. At a technical level as well, the guidance fails to take account of wider issues. For example, in discussing the treatment of transfers, it specifically suggests that, if a policy will promote renewable generation but at the expense of older generating fossil-fuelled technologies which would be displaced, this should not necessarily be included in the RIA.

54. "Placing the environment at the heart of policy making" receives very little emphasis within the current RIA guidance. Indeed, the fundamental structure of the RIA and the associated guidance is ill-suited to the overriding need for policy makers to be able to balance environmental impacts against social and economic impacts, and to assess the extent of any trade-offs which need to be made. In this respect, it betrays its historical origins which are more to do with minimising the impact of regulations than utilising the process to help achieve other policy goals. We do not see that the present RIA structure will do anything to address the failure by departments—which the Government has itself acknowledged—to improve their performance on environmental appraisal of policy measures.

55. We recommend that the Government considers restructuring the present RIA procedures by inserting a new higher strategic tier—to be named the Strategic Impact Assessment (SIA). This should separately identify economic, social and environmental impacts, and incorporate a summary appraisal table setting out these impacts on a single page for each policy option. Environmental impacts should be broken down and categorised in non-monetary terms on a plus/minus 7 point scale. In view of the huge challenges facing us in reducing carbon emissions, the impact on greenhouse gas emissions should be clearly highlighted and prioritised, as we have previously recommended. The SIA should also set out whether a Strategic Environmental Assessment is required. A second order tier of the assessment—to retain the name of Regulatory Impact Assessment—could be largely based on the existing RIA procedures for assessing regulatory, competition and other equity issues.

Capturing environmental costs and benefits

56. We also considered in the course of our inquiry the accuracy of environmental costs and benefits included in RIAs. In their written and oral evidence to us, the Environmental Industries Commission (EIC) advanced a number of arguments on this score, and some of the views it expressed were supported by other memoranda we received.[39] The three main points the EIC made were that:

RIAs often fail to capture certain kinds of environmental costs and benefits, in particular the wider benefits which high environmental standards can bring;
RIAs specifically do not tend to take account of the benefits that high environmental standards can bring for environmental industries themselves; and
industry groups have regularly exaggerated the costs of proposed regulations, sometimes so grossly that it has amounted to scaremongering.

57. With regard to the first of these arguments, the EIC suggested that—while RIAs were getting better in terms of including impacts on the environment—there were still significant categories of impacts which were often not included. They cited the benefits of high standards of regulation on health and tourism as examples of such costs or benefits. In commenting, for example, on the development of the Euro 5 vehicle emission standards,
Mr Roberts of Johnson Matthey expressed his astonishment that the RIA failed to take account of health impacts on children.[40] Indeed, according to the EIC, the impact of PM10 particulates on mortality and morbidity was specifically excluded from this RIA, while it was also unclear to what extent the health costs of ozone and NO2 had been modelled.[41] More generally, the EIC cited various studies in support of its argument that wider benefits could be substantial. These included, for example, one study valuing the occupational health benefits of the new REACH proposals at 54 billion Euros, and another valuing the amenity benefits of the Water Framework Directive at £2 billion for England and Wales alone.[42] Similar points were also made by CIWEM.[43]

58. We fully appreciate that some of these wider costs and benefits can sometimes be difficult to quantify and, as we set out below, we have grave reservations about the use of preference based approaches. The Environment Agency expressed its concern on this score, while the IEEP commented:

"Environmental impacts are more difficult to capture in this way. For example, how can the potential impact of a project on a nature reserve be assessed, or the effect of better air quality on health? Even if impacts could be quantified, it is often difficult to attribute monetary values to them. In contrast, it is somewhat easier to quantify and attribute monetary values to the economic and employment impacts of policy. Consequently, there is a danger that environmental impacts, including the costs of inaction, receive less attention than should be the case in decision-making. In a political context where economic growth is becoming of even greater import EU wide, it is now, more than ever, critical that environmental considerations are not sidelined in assessments."

59. If RIAs are to capture all the costs and benefits associated with policy proposals and new regulation, the Government cannot afford to ignore wider impacts—for example, on health and tourism. It must ensure that RIAs do indeed take full account of these wider impacts whether or not they can be meaningfully quantified in monetary terms. And where they cannot, it will be crucially important that adequate weight is given to them.

60. The second main argument revolves around the extent to which RIAs take account of the benefits that high environmental standards can bring for environmental industries themselves and the economy as a whole. In his evidence, the Director of the EIC, Adrian Wilkes, pointed out that the environmental technology and services industries depended for their existence on Government regulation. He suggested that high environmental standards promote the growth of the environmental technology and services industry and result in economic benefits both nationally and internationally.[44] Other organisations also supported this argument. The Environmental Services Association (ESA) for example, considered that RIAs did not capture the full economic benefits from high environmental standards, and went on to recommend that the Government should establish a specialist unit to advise on economic and environmental impacts when drafting RIAs.[45]

61. We noted with interest the comments of Mr Evans (representing Johnson Matthey):

"We feel at the moment that Government is listening—it did an awful lot in the first term, but the message coming over in the second term is that it wants to reduce the burden on industry and therefore is less keen to promote environmental initiatives that it feels are going to be in any way a burden on industry. That is the feeling that we have and that is borne out by the evidence we see of policy development.

… … we are a company that benefits from the innovation that regulation can promote. There are tougher regulations on vehicle exhaust emissions in other parts of the world such as California, so it is not as though the European market is disadvantaged because other markets have tougher regulations. We have a situation whereby regulations could be an opportunity to promote innovation and we see that as particularly beneficial for our sector…." [46]

Indeed, Ms Aitchison later commented that:

"I have seen occasions where North Americans who have been seeking to invest in this country have been put off because of the lack of environmental regulation that they perceive this country to have, and they have come in and demanded very strong contractual protection from the UK seller before they would take on board the potential or perceived liability associated with the company they were buying." [47]

62. With regard to the treatment of benefits to the environmental technology and service industry, the Cabinet Office position on this was briefly referred to above, but is worth considering in greater detail. Essentially the RIA guidance states that economic transfers between different sectors of the economy would not normally warrant consideration within an RIA as the costs and benefits on each side would cancel out. It goes on to state:

A policy can have 'displacement effects' within the economy, which is similar to pure economic transfers in that one group gains at the expense of another. For example:

- An increase in the renewable energy target which results in more windfarms, solar power, bio-fuel etc, and hence more jobs in these areas, but at the expense of investment and jobs in fossil fuel power generation such as oil and gas plants.

So, an RIA should not be biased by focussing solely on the gains to some sectors, whilst neglecting the losses to others. Hence it is not usually necessary to talk about job gains in an RIA. … … …

So, pure transfers (for example when one group is asked to pay for something and another group no longer has to) should be presented as a cost to one group and a benefit to another. However, it is not necessary to talk about the benefits of more jobs or increased consumer spending on a particular sector in an RIA as a result of a new policy when this is simply diverting resources from other areas of the UK economy. If you want to talk about these benefits in the RIA then make sure you also mention that some other groups will suffer corresponding costs, even when you cannot clearly identify who these are, for example when consumers' new spending patterns cannot be predicted.

63. Such a treatment of transfer or displacement effects may be technically correct from a narrow economic viewpoint, but there is a danger that it ignores the value of innovation. We therefore welcome the fact that the Cabinet Office memorandum confirms that such benefits should be identified. Even this, however, appears to us not to go far enough. We cannot help but recall that the wind industry in Germany now employs some 120,000 people, and we were reminded by the EIC of the fact that the UK is in danger of losing out in a global environmental technologies market worth $500 billion. Moreover, if we are to combat climate change, the UK needs to make far greater progress against the targets it has set itself for renewables and energy efficiency, and policy decisions therefore need to reflect the priority accorded to this agenda.

64. As current methods of evaluating environmental impacts fail to give adequate weight to global threats such as climate change and the loss of biodiversity, appraisal processes must take greater account of strategic objectives and targets which the Government has set in these areas. In so doing, they must adequately recognise the contribution which the creation of thriving environmental industries can make, and the RIA guidance needs to be strengthened in this respect.

65. The third main argument put forward by the EIC concerned the extent to which the costs of environmental regulation have been grossly exaggerated. In his evidence to us, Mr Wilkes provided two graphic examples:

a recent review of the implementation of the Air Quality Strategy had been carried out for DEFRA by AEA Technology. This calculated the regulatory costs at £3 billion—far short of the £22 billion which industry had originally claimed.
alarmist newspaper reports in 2003 had originally suggested that the EU Directive on Environmental Liability might cost £1.8 billion; whereas the actual costs had turned out to be only a small fraction of this (£52 million).[48]

66. We noted considerable support for the EIC's position. In particular, the Cry Wolf report published by the WWF in April 2004 documented many examples where industry had exaggerated the costs of complying with regulations. Moreover, the EU Competitiveness Report (November 2004) suggested that regulatory costs were not significantly high; while the Carbon Trust has also concluded that the EU Emissions Trading System will have little impact on competitiveness. Even the CBI, while claiming that the costs of implementing environmental regulation in the UK were £4 billion a year, acknowledged that: "UK business has incurred relatively low direct costs associated with regulatory compliance." Indeed, its report went on to say:

Expressed as a share of GDP, business expenditure on environment in the UK during the 1990s compared favourably with all of our sample countries, apart from Italy. Just over half of such spending in the UK went on items to prevent, rather than to treat, pollution (in principle, a more favourable environmental and economic approach)—a higher proportion than in other countries.[49]

67. There seems considerable evidence that industry and trade organisations regularly exaggerate the likely costs of implementing environmental regulations. Government departments are not in a strong position to assess industry claims in this respect, as has been demonstrated by the difficulties DEFRA experienced in negotiating Climate Change agreements and in managing the allocation process for the UK Emissions Trading System. We are therefore concerned about how reliably departments can assess such costs for inclusion in RIAs.

68. In this section, we have raised various concerns about the treatment of environmental costs and benefits within RIAs. While we feel strongly that the RIA appraisal process requires a major revision as we have suggested above, there is nonetheless a need to ensure that in the meantime departments have fully taken on board the changes introduced in April 2004. In the last two years, we have been working increasingly closely with the National Audit Office in order to extend the breadth and depth of our audit coverage. We appreciate that the NAO regularly reviews a sample of RIAs, but—given the recent changes in the RIA guidance and the particular nature of the concerns we have raised—it seems to us appropriate for the NAO to investigate these environmental issues further. We recommend that the NAO should carry out on our behalf an analysis of RIAs to assess how effectively departments have responded to the changes in RIA procedures from April 2004. The analysis should assess whether departments are accurately identifying and incorporating environmental impacts within RIAs in the light of the concerns we have expressed above. A supplementary objective might be to check that RIAs are in fact being completed for all significant policy proposals.

Competitiveness and de-regulation

69. In considering regulatory costs and burdens, the issue of competitiveness was never far from the surface. In giving evidence to us, the Director-General of the CBI, Sir Digby Jones, began by setting out his "violent agreement" with us on the need for carbon reduction targets of between 60% and 80%, and he acknowledged the need for the UK to show leadership here. Yet he almost immediately contradicted himself by restating his belief that "the UK Government risks sacrificing UK jobs on the altar of green credentials" and setting out the view that unilateral action by the Government would damage UK competitiveness: "I worry that we go into the ring of global competitiveness with one hand tied behind our back because we are one of the few nations that lead from the front and others do not and that renders us uncompetitive." [50]

70. Similarly, in a later exchange with Paul Flynn MP on the impact of high standards of environmental regulation, the Director-General stated:

Sir Digby Jones: "…can I just ask you, do you think it is the job of the government domestically to cause huge loss of production and mass unemployment through prosecution of extremely strict environmental rules and regulations?

Paul Flynn: The job of the government is to save the planet initially.

Sir Digby Jones: Even if that is sacrificed? [51]

Yet when asked which British companies had relocated abroad purely as a consequence of environmental pressures, he admitted: "In terms of they have left somewhere where there is a strict environmental regime and cleared off to a place where they can pollute, I would say nil." [52] The Director-General also denied that the setting of targets within Phase 1 of the EU ETS represented a 'race to the bottom' and claimed that the CBI stood for a 'race to the top'. Yet almost immediately this was contradicted when Mr Roberts went on to argue that, if other countries did not adopt similarly demanding guidelines, the UK should not adopt a more stringent regime itself.[53]

71. Other witnesses also highlighted the extent to which the CBI had exaggerated concerns about competitiveness. In giving evidence on our recent inquiry on International Leadership on Climate Change, James Cameron of Climate Change Capital said of Sir Digby Jones:

" I think it is enough to say that there were a number of well quoted—because he is very quotable—statements about how this Emissions Trading Scheme is going to damage British industry for 40 years—that] was the time frame he offered—and that we would be put at a competitive disadvantage to our European allies, and that essentially we were taking on board too much pain here as compared to others in Europe. All three of those statements are inaccurate."[54]

72. Moreover, as we have pointed out above, studies undertaken to date do not appear to support the view that environmental regulations were damaging competitiveness. The Green Alliance argued that, in the face of widespread industry lobbying and the propensity of the DTI to take on board the views of organisations such as the CBI, this was an issue which needed to be examined in depth and laid to rest. "We have had the Wanless Review on Health, we have had the Barker Review on Housing so we think we need an equivalent on environmental competitiveness to actually try and nail that one once and for all." [55]

73. We are sceptical about the extent to which environmental regulations damage competitiveness, and we reject the scaremongering approach which the Confederation of British Industry has often adopted in this respect. However, given the amount of industry lobbying and the extent to which it has been successful in weakening proposed environmental regulations, further examination of these issues is needed. We therefore recommend that the Government should commission an independent review of the impact of environmental regulation on competitiveness.

74. We have one other serious related concern. In the context of 'better regulation' rather than 'more regulation' the Government has recently launched a major initiative to reduce regulatory burdens. Budget 2004 included a proposal to set up the Prime Minister's Panel for Regulatory Accountability to reduce the flow and improve the quality of regulation at UK level ensuring that regulation is used only where necessary. In addition, it commissioned Philip Hampton to lead a review into regulatory inspection and enforcement in order to reduce the administrative cost of regulation. The Prime Minister's Panel is now operational and there is an increasing drive to substantially reduce regulations across government.

75. This initiative is gathering pace. We note, for example, that the DEFRA's recent Five Year Plan includes as a target a 25% reduction for business and farmers. The Better Regulation Task Force, originally established in 1997, and the Regulatory Impact Unit within the Cabinet Office are now also at the centre of the deregulatory drive. Indeed, the Cabinet Office memorandum sets out the structures in place to facilitate the initiative—including the role of Regulatory Impact Units and Board Level Champions for Better Regulation within each department.[56]

76. While we entirely agree with the need for better regulation, we are concerned at the potential conflict between the need to reduce regulatory burdens and the need to ensure that environmental objectives are fully incorporated within the policy appraisal process and given adequate weight. We therefore find it unsatisfactory that these divergent processes and objectives should now have been merged within the function of the Cabinet Office Regulatory Impact Unit. We are particularly concerned at this development as the Cabinet Office has still not set up a Sustainable Development Unit which might provide expert advice on environmental and sustainable development issues to the rest of the department.

77. Moreover, we are concerned about the role of the RIUs and Board Level Champions for Better Regulation within each department. The Government must clarify how these structures tie into existing initiatives for greening government—in particular what role the Green Minister and senior official for sustainable development has in all of this, and whether a duty to promote sustainable development has been incorporated within the remit of departmental RIUs and Board Level Champions.

Postscript: placing a value on the environment

78. In previous reports we have expressed our concern about the emphasis which the Treasury has increasingly been placing on valuing environmental impacts in monetary terms.[57] Such an emphasis is reflected throughout the Cabinet Office memorandum and in the RIA guidance itself. Indeed, RIAs are based so fundamentally on the concept of financial valuation that no consideration is given to alternative methods of valuing environmental impacts.

79. In this context, we want to make here only three brief points. The first relates to scientific uncertainty and risk. With regard to climate change, there is now a growing consensus that an environmental limit exists, beyond which potentially catastrophic impacts might occur if greenhouse gas emissions are not reduced drastically by the end of this century.[58] However, the Government's valuation of carbon for appraisal purposes takes no account of the risks of catastrophic changes to the climate. Given the recent evidence that such risks might be more serious than previously anticipated, we await with particular interest the outcome of the inter-departmental review of the cost of carbon which is currently being conducted and is indeed overdue. With regard to the loss of biodiversity, the nature of any environmental limit is not yet clear. However, the recent UN Millennium Ecosystem Assessment report suggests that the consequences arising from the catastrophic loss of biodiversity may be equally serious.

80. The second point relates to the fundamental tension between economic appraisal and the time spans over which environmental impacts occur. The time value of money and the discounting of future costs and benefits may be appropriate for business investment decisions spanning a decade or two. But beyond 40 or 50 years, uncertainty becomes so great that no meaningful appraisals can be conducted. How then is one to value a potentially catastrophic impact which might occur in 100 or 200 years time? Indeed, it is precisely because conventional economics 'runs out' that governments need to provide long-term policies and signals—such as the UK's adoption of a 60% carbon reduction target for 2050. It is a measure of how inadequate RIAs are in this respect that the guidance suggests a 10 year discount period is generally appropriate.

81. Our third point takes this argument further. We see fundamental problems in reconciling the short-termism implicit within economic appraisal processes and preference-based valuations with the long-term nature of sustainable development and the need to abide by environmental limits. There are major conceptual problems in relying on preference-based valuations and such values will in any case vary depending on the degree of knowledge and awareness of environmental issues. We would be interested, for example, to see what valuation the public might place on the possible extinction of a third of all species over the next hundred years. Moreover, as we have previously suggested, the preferences and valuations people express—whether directly or indirectly—could change dramatically as climate change bites deeper, with large increases in the associated environmental costs.[59]

82. For these reasons, we agree with FoE's verdict:

Future generations get an all round bad deal from appraisal such as RIA: longer-term, irreversible environmental impacts that will impact most on future generations are marginalized by the process; future generations are not considered in appraising social impacts such as on distribution; estimates of impacts on business routinely ignore the ability to innovate; and we still use a discount rate that institutionalises, as the Green Book puts it, the view that "society as a whole prefers to receive goods and services now rather than later, and defer costs to future generations". [60]

Indeed, it seems to us that a blinkered focus on aggregating all impacts and balancing them in monetary terms represents a major step backwards in the development of integrated policy appraisal approaches. In this respect, we found the comments of the IEEP particularly apposite:

Therefore monetisation may create as many problems as those it may appear to solve. Perhaps the major challenge for both the UK and EU is how to ensure that qualitative information is given sufficient weighting in relation to quantitative data in policy appraisal/impact assessments. The use of other methodologies, such as critical thresholds as a way of limiting environmentally unsustainable trade-offs, should also be explored more fully. [61]

83. The primacy which the Cabinet Office memorandum and the RIA guidance place on monetarising environmental impacts is fundamentally mistaken. It is simply not possible, for example, to quantify meaningfully in financial terms the value of the climate to us: in that sense, it is literally priceless. In reverting to a crude aggregation of financial values to decide between competing policy objectives, the Government has failed to face up to the challenge of developing an approach to integrated policy appraisal which places adequate weight on non-financial impacts and environmental limits.

31 See paragraph 1 above Back

32 EAC, Thirteenth Report of Session 2002-03, Greening Government 2003, HC 961, paragraphs 35ff.See also EAC's Thirteenth Report of 2003-04, The Sustainable Development Strategy :Illusion or Reality?, HC 624, paragraphs 94ff.See references in these reports for material quoted here. Back

33 Ev47 Back

34 The EAC examined this issue in its Third Report of 2003-04, Pre-Budget Report 2003:Aviation follow-up, HC 233 Back

35 Ev91 Back

36 ibid. Back

37 On 4 April 2005, some changes were incorporated into the web version, though these would not appear to materially affect the main considerations raised in this report and the Cabinet Office's memorandum did not give any indication that the guidance was to be significantly revived. All quotes from the guidance in the following paragraphs are from the March 2005 version Back

38 Ev90ff Back

39 The EIC memorandum is at Ev8.See also Ev42,108 Back

40 Q 25 Back

41 Ev27 Back

42 Ev11 Back