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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 105-iii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENTAL AUDIT COMMITTEE
THE INTERNATIONAL CHALLENGE OF CLIMATE CHANGE: UK LEADERSHIP in the g8 & eu
Wednesday 15 December 2004 MR JAMES CAMERON Evidence heard in Public Questions 296 - 358
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Wednesday 15 December 2004 Members present Mr Peter Ainsworth, in the Chair Mr Colin Challen Sue Doughty Paul Flynn Mr Mark Francois Mr John McWilliam Mr Simon Thomas Joan Walley ________________
Examination of Witness
Witness: Mr James Cameron, Founder and Board Member, Climate Change Capital, examined. Q296 Chairman: Good afternoon, Mr Cameron, it is nice to see you, thank you very much for your time. Do you have any introductory remarks that you would like to make to the Committee? Mr Cameron: I thought I would introduce myself and Climate Change Capital, if that is okay? Q297 Chairman: Feel free. Mr Cameron: My name is James Cameron. I am a barrister by training and have been a professor of law, and one of the founders of a new specialist merchant banking group called Climate Change Capital. I have spent the best part of 18 years working on the climate change issue, as a lawyer. I did that initially through a foundation which I founded with some others, the Centre for International Environmental Law, which became the Foundation for International Environmental Law and Development. I have taught international environmental law all over the world, at London, Cambridge, Bruges, Sydney, and my last remaining academic connection is with Yale, with the Yale School of Environmental Law and Policy. I negotiated all of the climate change agreements. From a long with that I wrote the first law review article on Climate Change and State Responsibility, back in 1989, which was published in 1990. So I have been there from before the International Negotiating Committee on Climate Change. So the Second World Climate Conference would be the first key event; then leading into all the negotiations for the Framework Convention on Climate Change and then ultimately Kyoto. It is that experience and building a specialist practice within the world's largest law firm, Baker & McKenzie, that encouraged me to build a bridge between the world of policy and law on the one hand and the world of financing and investment on the other. So Climate Change Capital is a specialist merchant bank and it is as a consequence of that experience and the getting together with specialists from insurance and investment banking and from research and analysis of the related markets to the carbon market that Climate Change Capital is a little over a year old and is the first institution of its type anywhere in the world. I think it is right to say that it could not have been created with that name anywhere else but here, in London. Q298 Chairman: Thank you very much indeed. You obviously know your Climate Change. We have quite a lot of ground to cover and a limited amount of time and therefore it would be very helpful if you could try to keep your answers as snappy as possible, and we will try to do the same with our questions. On that basis, let me begin by asking you how you think that the investment community at large views the EU ETS? Mr Cameron: I think it is fair to say that the investment community is, by nature, sceptical about markets that are formed by policy. Or put another way, investment that is dependent upon policy. That scepticism is pretty well founded. It is also exaggerated, and the reason why it is exaggerated is because in this context Emissions Trading is a device designed exclusively for delivering an environmental policy, and there is no reason for it to exist other than to reduce tonnes of carbon dioxide or, in due course, carbon dioxide equivalent from the atmosphere. So at some point the usual grounds of scepticism in the investment community, "Should I depend upon this government policy or will they take it away or will they change it fundamentally and make my investment either lose money or made less of a return than I promised my investors," that sort of concern, becomes an issue of credibility in the system as a whole. Provided - provided - that this government and others - and it is a very substantial international market now - display total commitment to this particular policy device investment will happily follow into Emissions Trading. In that proviso there is a concern about how things have started and investment for low carbon technologies, for example, will not flow to support Emissions Trading or be behind Emissions Trading unless the price signal is loud enough and strong enough, and in the first phase of the EU ETS it is not loud enough or strong enough for investment; it is probably enough for people to trade, but there is a distinction there between what is enough for people to do transactions, to comply with the law, and what is sufficient to make them invest in solutions? Q299 Chairman: So your biggest concern about it, from the point of view of a financier, your latest hat, is political uncertainty? Mr Cameron: Yes. The investment response which ought to follow from this policy framework, and where there are real prospects that this policy framework will encourage significant investment, is contingent upon belief that the system will endure, that the policy makers are serious that they will keep it there. Secondly, that the price signal is sufficiently loud and clear early on for investment. I do need to break this up into parts because a price of, say, around 5 Euros a tonne of CO2 in the EU is more than enough for people to begin trading and to exchange value from their balance sheets from next year onwards in the first phase. But for many companies it will not be enough for them to change their investment patterns to invest in the solutions. Once the price gets above that and starts to make a Board allocate resources over time to meet quite a large exposure, quite a large potential liability, then you are really achieving something out of Emissions Trading. You will still get reductions but they will be modest. The beauty about Emissions Trading is that if you capture the commercial consciousness of the investment boards of companies you will not only take tonnes out from the scheme itself but you will encourage people to put investment behind low carbon technologies over time, providing you get that pricing clear. Q300 Joan Walley: If I could just come in here quickly. You are talking about the investment community. Could you just say very briefly how you see the investment community relating to business sectors and the kind of interface between those? Mr Cameron: That is a very strong point because there is a simplistic blurring of edges here because the investment community includes, for the purposes of this exchange, companies with their own balance sheets to invest, as opposed to banks and private equity houses and the various other people who put money into the system. So I have been talking about the total sum of investors, which includes companies investing their own money to either secure compliance or to achieve competitive advantage over others who may not be so adept at responding to these policy signals. For the time being a good deal of the money which is available to be spent on taking tonnes of carbon out of the atmosphere is on the balance sheets of energy companies, power companies and the like. But what is actually more interesting in the medium-term is that if others see an investment opportunity, investing their money and of course their clients' money into the market place, which is supported by a price for carbon - and this is one of the many reasons why I am enthusiastic about Emissions Trading - once you establish a reliable price for carbon you incentivise a lot of other investments which may emerge in clean fuels or other clean technologies, energy efficient technologies, or, ultimately, in renewable energy itself, and this produces very attractive synergies between the carbon market, which is useful in itself in taking tonnes out of the atmosphere, but other markets that can borrow value from a price per carbon, make an argument to a private equity firm or venture capitalist or even bank lending, providing debt to a company that has a solution. Q301 Mr Thomas: A follow-up question. I was interested to hear what you had to say initially about your concerns about the initial stage of the EU Trading Mechanism and that you felt that there was not sufficient incentive there or possibly, as the Chairman said, political certainty to get that investment and all those investors going. And in the light that the government only last week of course missed its own target for CO2 reactions. What sort of reactions does that send out to the investment community, that this government is not hitting the targets and now we are asking the investment community to come along and help all the governments in the EU to meet targets? Are the signals strong enough, is what I am trying to get to here? Mr Cameron: I think the signals are strong enough to begin and early on next year we will see that, and there will be a carbon market in Europe - and a short pause here to say that that is a remarkable achievement. To all those who have been involved with constructing that, the often unsung, much criticised civil servants here and in Brussels, well done for having created such a thing. But the investment community wants to be sure that the market that has been created, for this environmental purpose, is sufficiently "short", to use the traders' jargon; that people will trade; that there will be sufficient activity in the market place for it to be meaningful. I believe that it will just about be sufficiently short enough for people to trade, but barely, and it ought to have been shorter; it should have been more demanding. There is going to be some embarrassment, I think, in the early phase as to who has done really rather nicely out of the allocation process. We have got time to put it right for the next phase, but we will need to see very early on - next year - a serious commitment for making the next phase significantly shorter and harder to achieve, and if you do not have that you certainly will not get real investment - you will get a little bit of trading but you will not get real investment - and you will get people holding back and waiting to do things, which they really ought to be getting on with now. Chairman: We are leaping ahead a little into territory that I would like to cover in a little more depth in a moment. Mr Challen. Q302 Mr Challen: I wanted to know if you thought that there was any relationship between if there was a low price for the carbon and therefore not much liquidity in the minds of the Board, and whether they have penalties that would then kick in, as it were, to incentivise them to trade more? Mr Cameron: Not if it is too easy. A market does not really work if the majority of the market place sits on their allowances and waits for one date in the year at the end and hands them over. It is okay for some and the vast majority of those roughly 15,000 installations across Europe do not have specialist carbon trading teams, and are not going to create them any time soon and have relatively modest demands placed upon them. If there is a very low price they do not have to worry too much - it is not going to hurt their business one way or the other - so they might as well just do what they have to to comply. That might be one single trade in a year, and that is not really very much to be excited about in creating a liquid market. However, there are all sorts of variables that feed into the carbon market: the price of oil, the price of gas, the price of power, the weather, what sort of winter we have. These things do have an influence if you are a large energy producer or consumer and if people do sit on their allowances and there is not an active market, and if there is some kind of shock or surprise you might get a very uncomfortable, unprepared-for spike in the price even in this early phase. So the only sensible and rational thing to do for someone in receipt of these allowances is to find out how they manage their risk early, and they really ought to be in some way involved with training, even if they hand the burden on to someone else if they work through a trade association, or their bank or somebody who does it on their behalf, if they do not really want to do it on their own. Q303 Mr McWilliam: Some of my questions we have partly gone into, so forgive me if I ask them again because we want to look at them a bit more narrowly. In your submission in chapter 18 you said, "Preventing dangerous levels of climate change is primarily an investment problem. Success or failure will depend upon whether the right investment framework can be created." Does that not run counter to the criticism you made in your opening remarks about markets being deterred by being driven by the policy rather than a hard-headed business decision? Mr Cameron: No, because the energy markets, power markets have always been heavily influenced by regulation. The waste market does not exist without regulation, and I am not of the view that there is too much policy uncertainty here. That is because I have worked on it for years and years and I understand it. But I was asked a question generally of the investment community and I accurately recorded a general view of the investment communities. I happen to believe that the policy frameworks are perfectly clear; they are not doing as much as they ought to but I am confident that the Emissions Trading Scheme will work and will develop and will have a useful effect on not just establishing the price of carbon but encouraging other related markets. Q304 Mr McWilliam: The setting of targets is clearly a crucial aspect of the EU Emissions Trading Scheme. You state that the Phase 1 targets are too lax and do not even accord with the Kyoto targets that Member States face, and this will need to be radically tightened up in Phase 2. Why do you think this situation has come about? Mr Cameron: I think the way that most policy is made in most governments - and we are no different here - enables a certain type of industrial lobbying to be very effective, particularly around the competitive arguments. The stuff that you hear in these Committees year in year out - and I have been a specialist adviser myself in other Committees - I have listened to the arguments that get brought forward, and they work, they are effective arguments; there are often reasons, particularly in the environmental regulation field, for either not regulating or regulating softly or taking account of a certain type of interest, and I think it has been successful again. As it happens I think that strategy fails to accord proper recognition to the substantial business interests in an effective Emissions Trading Scheme, most notably in the City but also in support in the professions, in accountancy, in law, consultancy and the various other new businesses that are growing up around a market for emissions - certifiers, validators, people who are necessary practitioners to offer comfort to investors in carbon. So I think that the competitive arguments have been very badly managed, they have been very misleading, counterproductive and, in many cases, irresponsible, but they have worked and we have to live with them until the next time around, because I very much hope that Ministers and senior civil servants have kept a very close record of the arguments which are made to them for having a softer allocation than there otherwise ought to have been the case. Q305 Mr McWilliam: Do you not think that the situation will exist and they will fundamentally damage the credibility and the operation of the ETS? Mr Cameron: It has already caused some damage. There have been plenty people in my day to day work who have said that, "When it comes to it the market is not worth very much; not enough there yet, I will wait until the next round. Let us see what they do in the next phase." Certainly there are a lot of people out there with that view, but personally I think there is enough there to get started. More should have been done but there is enough to get started, and as long as we signal very early in the day - and this process is underway so I am not telling the government anything other than what it is already doing - that we will not get fooled again, that next time around these emissions are going to be considerably reduced, and in a sense what has happened is that you have made it harder for us all the next time around. That conversation, of course, has to go on with our European counterparts because it is mirrored in virtually ever Member State. Q306 Mr McWilliam: Coming to that, Member States were allowed to set their own caps for Phase 1. Do you think that there should be an EU-wide target cap for Phase 2? Mr Cameron: Ideally, yes; practically it will not happen. So some way of negotiating between the ideal and the pragmatic, as ever, will have to be done. This is a big market place. You listen to several rather critical remarks about the beginnings, but they are the beginnings of something very substantial, and to have 25 countries in a system with what will be greater scope in the next phase is a major undertaking. So when I get over my complaints about the lack of ambition at the start I am aware of how demanding a policy challenge this is. It is obvious that the Commission would have a preference for a solid pan-European target, but equally they do not have exclusive competence over this issue, they have to share it with Member States and, what is more, new Member States that are taking on obligations the like of which they have never had before. So it is just not going to be possible to do this on a hard pan-European basis and we have to start negotiating right away at a Member State level. So that is what will happen, I am afraid. Q307 Mr McWilliam: The targets set in the EU ETS are short-term - only three or four years. Do Emissions Trading really work with that sort of approach, or do you think it should be based on far longer-term target caps? Mr Cameron: There is no doubt that there is a problem associated with a regime that appears to end with a cliff, and investors do not like that either at all. So together with it will be harder in the next phase the next thing is that there will be a phase after 2012. Both those are required because you look at a long-term power purchase of agreement, for example, that extends beyond 2012 - a lot of financing is going beyond 2012. So investors want to know that there is no cliff face. There will not be but people who do not spend their lives in these sort of presences do not know that, so they need to be told and to be left in no doubt that this regime is continuing on past 2012, both at the international level - which of course is what is going on now in Buenos Aires, at the COPPE - but also at the regional and domestic levels, the EU and the UK. Q308 Mr McWilliam: If we did have far longer-term targets to what extent would they have to be more radical? Would the investment community have any greater confidence in those targets - and you seem to say they would - or would it simply not assume that, once the going got tough, States would renege on their commitments and there would be a political fudge? Mr Cameron: What we are looking at here is the development of a market place that requires very, very careful and skilful intervention from policy makers. Too much and the market will withdraw, too little and there is a danger that the price becomes unstable in both directions, or either direction. So the first thing, the most crucial concept of being able to communicate consistently amongst the policy making community and to investors is that this is a market that has to be kept permanently short, by which I mean to have any chance of delivering large tonnes of CO2 or CO2 equivalent reductions over time we have to keep making it more and more ambitious; we have to make sure that we do that projection; there has to be some discipline imposed by the scientific consensus, that is what it is there for. So bit by bit, phase after phase, you have to be checking progress against real reduction targets, and ultimately the one that is contained in the Framework Convention on Climate Change, which us and the rest of the world have signed up to, stabilisation of greenhouse gas concentrated in the atmosphere, which, for the time being, we have fixed on the 550 parts per million target. So Emissions Training has to be linked to that, and of course we have just started and we are nowhere near that. That is the first thing to communicate. The community market will get there but what they do not want to find out is that if we achieve somehow then, again, it is all over, we have literally done our job, because that will not be the case; we have to keep going to reduce. The second thing that needs to be consistently communicated to investors, and indeed the actors, is that we will not allow the price to fall to nothing or to go so high as to cause damage to our industrial and large energy user base. This system cannot work if the price falls down to a Euro, does not do anything, cannot work. But equally, if it shoots up to 50 or 60 early on, you watch - people will give up. So that requires skilful management, conceptually not a lot different from interest rates and the sort of key statistics that any government must watch in its economic affairs, the sort of thing the Treasury monitors, that the independent central banks of Europe look at too. That is the kind of analysis you need because it will be disastrous for this market if you had either very high or very low prices. Q309 Mr McWilliam: Was the use of the free grandfathered allocations simply designed to buy over industry? Would you favour a move to the far greater use of auctioning? Mr Cameron: Yes and yes. Q310 Mr McWilliam: My final question is this: I gather that the power sector will enjoy substantial windfall profits in Phase 1. Is this true and, if so, why has it come about and can you put any figures on it? Mr Cameron: I have knowledge, which I am afraid will have to remain confidential, but I have made a point publicly and I have made it directly to Ministers --- Q311 Mr McWilliam: Was anything I have said substantially inaccurate? Mr Cameron: The truth be told, there has been a problem not just in this country but in other parts of Europe in the way that the "Business-As-Usual " reference point has been used to calculate reductions for, in particular, the power sector, which means that because we have now gone, since April, to a new target hooked upon Business-As-Usual projections, albeit on better data than we had earlier in the year, it is very hard to tell now whether those predicted reductions are going to be real. To my certain knowledge a number of power companies in this country are going to be sitting very comfortably on their allowances and will be able to convert them into valuable income on to their balance sheets. Now, at the same time I know that a number of the CEOs of a number of those companies are very aware of that, that they know the markets - and one of the beauties about these markets is that they are a whole lot more transparent than a lot of other regulatory deals that are done in other parts of the world - and we are not immune to them here - and the markets are very good at finding out these things. There will be some embarrassment and it will have to be corrected. The CEOs will have to act very responsibly with their windfalls. Q312 Chairman: Could you give us any idea of the scale? Mr Cameron: No. I will simply say that when I express frustration at the way the lobbying worked and some of the pronouncements that were made, in particular by the Director- General of the CBI, on the media I knew very precisely how inaccurate those pronouncements were; that there was not going to be a great deal of suffering in the power sector; that there was not going to be a great deal of suffering in the industrial sector; that the price for carbon was going to be low and there were lots of options available to industry to meet those targets. I think I must leave it at that. Q313 Chairman: We are hoping to see the Director-General of the CBI later on in this inquiry. Mr Cameron: I hope you are very firm with him. Q314 Chairman: If you are not specific how can we be firm? Mr Cameron: I think it is enough to say that there are a number of well quoted - because he is very quotable - statements about how this Emissions Trading Scheme is going to damage the industry for 40 years - was the time frame we 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. Q315 Paul Flynn: I am reluctant to move away from that line. We will look forward to that meeting. Could you clarify for us the type of trading that is likely to happen under Kyoto? There seem to be three distinct levels. There is the inter-country trading, the trading under the Joint Implementation Schemes, such as the EU ETS, and trading in CER credits which arise from the CDM projects in developing countries. Is that a reasonable understanding of the position? Mr Cameron: Yes. There is no such thing as a single carbon market; there are several markets. It is likely that over time they will converge - there will be a tendency to converge. But it is going to take a good many years before that happens. Q316 Paul Flynn: Do you think that there is a risk that political deals between different countries, even countries within the EU, might undermine the growth of inter-country trading through EU ETS? Mr Cameron: No, I am not all that bothered about the inter-governmental trading, I do not think it is going to take up a large proportion of the carbon market. I would like to see transactions that involve the trading of what is called an "assigned amount", which is what is given through the Kyoto Protocol to governments in order to enable them to stay within a cap imposed by the Kyoto Protocol. I would like to see those sort of transactions heavily scrutinised and a commitment made to ensure that in some way or other real reductions are associated with the transaction. So if the UK government - actually it is not in any position, has no interest in doing this - so if a European government wants to buy an assigned amount from the central European or Eastern European government, that they will be sure that that transaction was going to directly lead to real reductions. There are ways to do that. There is a rather loose phrase, but it is not bad for communicating, that you can "green" your assigned amount transaction and I would like to see that done on a routine and organised basis and you could do that by way of political commitment - there is no legal obligation to do that. I think that if there is significant pressure to reduce emissions in the second phase of the EU ETS there will be demand for those sorts of reductions. It is also the case that countries like Canada are now very far off their target, so the Canadians who had a six per cent target off a 1990 baseline are now in the order of 40 per cent off their target by 2012. That is a very big number and they are going to want to do some government-to-government trading. But I think they prefer on the whole to purchase from projects that work through the Kyoto mechanisms. Q317 Paul Flynn: You have been very helpful talking about the price. Do we understand from what you are saying that you might regard the present price as too low and, if so, what sort of price do you think it might settle at? Mr Cameron: If my esteemed colleague Tony White were here he would talk you through those numbers very confidently, and I take great care not to make price predictions. It is obvious that if you can establish a price - and let us call it in the ten to 15 Euro range - relatively early on, that is enough for people who have a tough target to meet as a company to start to make investments of their own capital to reduce their exposure to that sort of price, and it is enough to tempt speculative capital into the market place, and it is enough to take investment capital and apply it to businesses that provide the solutions. A price of 20 is extremely exciting for a solution provider in renewable energy or clean fuels - they are going to be very excited by that - but others who have a large liability, if it happens too quickly, are going to be very bothered by that. So if we are going to reach prices of 20 or 30 or so let it be gradually, please, and in a managed way otherwise we will definitely scare people into more robust resistance. The trick really is to balance real pressure to reduce through an Emissions Trading Scheme bounded by law here, with opportunity for valves to open up to release pressure through these other instruments in other parts of the world. So you want to constantly calibrate, pressure to reduce and valves to allow flexibility in forestry based credits, in emission reduction in the developing world, in transactions with other Emissions Trading Systems, whether they be at national or sub-national level, these sorts of things. Bit by bit you want to build a big global market to give yourself the maximum flexibility and range. Q318 Paul Flynn: If there is a really tough approach to Emissions Trading can you see it becoming a demand management tool, and is that not a way of making the economy more carbon aware? Mr Cameron: Yes, absolutely. As soon as you consistently establish a price for carbon so many other things follow. There is actually no limit to the creativity of our business and entrepreneurial community. They pick up on signals all the time. It is amazing how many people come up with the most bizarre ideas for reducing carbon once you have incentivised them. There are all sorts of possibilities that you would never think about, which again is why this works. People who want to reduce carbon from the agricultural sector by capturing methane, people who have all sorts of ideas. The forestry area, which is a perfectly sensible way of taking carbon out of the atmosphere. There are projects associated with switching fuels, energy efficiency projects, district heating, the list is endless. All perfectly sensible approaches that switch from being not quite cost effective to being, to use the jargon, "in the money" because of the price signal that you get. Q319 Joan Walley: Just staying with Europe for a while, in paragraph 36 of your evidence to us you talk about barriers to the effective operation of the market arising from subsidiarity, and you go on to talk about a range of issues which are not perhaps synchronised and that being a barrier to getting trading going. How are we going to overcome those? What signs do you see that there is progress being made on those? Mr Cameron: You have to sit down and work through the detail very carefully and painstakingly. Q320 Joan Walley: Who is doing that? Mr Cameron: The Commission is leading it. They need a lot of support from Member States, the cooperation from people who have expertise in Customs & Excise and VAT areas and from the accountancy profession, from the Financial Services regulators. There are lots of market issues that have not been properly resolved, which are all barriers to people doing business. Q321 Joan Walley: So what is the mechanism by which that joined-up approach to work through all of those difficulties could come about, and will it be something that could be taken up through the UK Presidency? Mr Cameron: Yes. Q322 Joan Walley: What is in situ at the moment? Mr Cameron: I hope a lot of those things will be resolved before the Presidency begins, but certainly if they have not been, absolutely the Presidency will be very helpful; it is enormously helpful to have these twin Presidencies next year at the G8 and the EU, that really is a boon for us here in the UK. Q323 Joan Walley: But the investment community is taking these barriers seriously? Mr Cameron: Yes. You want to get the mainstream involved. I happen to be delighted that the mainstream is just a little bit behind the pioneers, but really from a policy point of view you want the mainstream involved, and they have too many reasons for not getting involved when these things are not sorted out. For some people there is money to be made in the incoherence. They will always do well with arbitrage between errors, glitches in the system once they find out what they are. But to get the system to work smoothly so that it is relatively easy to transact, to take large amounts of carbon dioxide out of the atmosphere, and it just keeps running on so that the dynamism in the system keeps delivering emission reductions. That is what you want, you want the market people to do it, get on with it, and then you, the policy makers, keep fine-tuning the machine. So they all get up, they trade and trade and trade away and what we are doing is they are reducing carbon, reducing carbon and that is what you want. To do that, so that the system is well oiled and efficient, you have to take away these glitches and tax glitches and regulatory glitches. If I want to do business in Spain, to trade with a Spanish utility with them selling me some of their allowances - or it might be better the other way around, with a UK power station selling some of their surplus to a Spanish operator, and if I do that, having met the gentleman in Spain, and I transact, am I allowed to do that? Does the Financial Services regulation entitle me to do it or must I be registered with the Spanish authority to do that transaction? These are little but important things which are not quite sorted out. Q324 Joan Walley: Who is charged with taking the lead on that? Who are the people who can get those going? Mr Cameron: The people responsible for Emissions Trading in government here are Defra, who take the lead on these things. They are a very good team and are working extremely hard on all of these issues. They are fully aware of these questions and they just need a bit of help and support, with others, and they need for it to be a priority to dedicate negotiating time too, and they need good expertise to help them to iron out these things, and they need cooperation from the Financial Services and the tax authorities and these sorts of things. Q325 Chairman: Are you engaged in advising Defra on all this? Mr Cameron: We have very good relations with Defra and indeed other parts of government and we have meetings lined up with Treasury as well, which will be helpful to conclude swiftly. Q326 Joan Walley: And with the CBI? Mr Cameron: No, not this directly. Q327 Joan Walley: One of the things that you refer to again is transparency and you refer to the situation in Japan where they are thinking of introducing a mandatory monitoring scheme. Do we need that here? Is that something you would like to see taken forward globally in the UK and in Europe? Or can we have trading without it? Mr Cameron: It comes down to trust in the system; people need to feel comfortable that when they do business they are transacting in something known and understood. So high levels of transparency are good for the system. That is not to say that there will not be people who are very happy to do very well in the rather darker regions of the market place. But to make the system function effectively transparency is a good thing. Q328 Chairman: If mandatory, yes or no? Mr Cameron: I think probably yes. Q329 Joan Walley: Without going into the detail of the Company Law Review which took place, is there scope within that to enable that degree of mandatory monitoring, or could there be, easily? Mr Cameron: You have to be careful in one regard. You cannot disable trading because everybody knows your position. There is a certain type of transparency that is totally counterproductive because people will hide their position in various ways. But you need to be able to trust that what passes through your account is the real thing, and so it is fairly understandable that although I will answer to your question yes, that I would want to be very careful with what it is that is mandatory. I would not want there to be a rule that requires somebody that has a position in the market place to disclose that to their competitors. Chairman: I am aware that time is passing and we have another important witness to listen to, so if we can move swiftly through the next set of questions. Q330 Mr Challen: Given that you were heavily involved in the drafting of the CDM part of the Kyoto Protocol, how do you view its subsequent development? Mr Cameron: Yes, I was heavily involved with my colleagues, advising all the alliance of small island state countries and my perspective of it comes from that experience. There was a genuine bargaining between north and south that offered real opportunity for investment into the developing world to enable them to have a better technological input into their particular energy production and consumption, and I am a fan of using the CDM to add flexibility now to our European market. However, for various reasons, notably concern in the non-governmental organisation world that the Clean Development Mechanism would be used as a sort of excuse for inaction in the developed world, it has been burdened with a number of ancillary rules to the original one that I helped draft, which I think are problematic. In essence I would like to see the CDM operate with a bias towards volume, lots of projects, with the risk that some of those projects - every now and again there is a fraudulent one, every now and again it does not deliver what they said they were, and the monitoring of those projects is crucial - but take that risk in order to get lots of capital to flow for lots of projects. I want the bias that way and I think the CDM is a waste of everybody's time and effort if you do a handful of Mary Poppins' projects a year, "practically perfect in every way", and of no use. So the CDM is potentially a rather beautiful device for bringing together the north and south and the collective solving of the Climate Change problem, but only if its mechanisms function efficiently and a lot of projects can pass through it in a calendar year. At the moment I am worried that insufficient projects will pass through, that there is a misguided notion, misinterpretation of what we meant by the concept of additionality. I do not know whether you want to go into this level of detail but there is a real problem with how that works, and in essence that mechanism was designed only to prevent public money aid being diverted away from poverty into these projects. At no stage was it designed to prevent profitable projects being conducted in the developing world. Q331 Mr Challen: So additionality was one of the extra rules introduced, was it? Mr Cameron: It is not even an extra rule, it is just an interpretation that seems to have developed, utterly irrational and, I am afraid, totally counterproductive from an environmental point of view. It carries no merit from the environmental point of view. What it means is that it encourages a kind of doublethink first and a double-speak later on behalf of the project developers. So somebody who wants to do a big emission reduction project in Brazil has first of all got to go to their Ambassadors or their Board and say, "We are going to do this because it is fundamentally a good idea," and then they have to pretend that it is actually fundamentally a bad idea from a commercial point of view in order to ensure that the carbon finance element is additional, or constitutes additionality, and this is a really very bad way to proceed. The only point to additionality - I am sorry, I have gone there and I did not mean to - is to stop public money being diverted, it is not to prevent profitable projects being done. Q332 Mr Challen: Does that mitigate against trying to capture the low hanging fruits? Mr Cameron: You want profitable projects to be done. All you need to focus on is the "but for" test. If this project did not exist would we get these reductions? That is what you have to focus on, and you need to have a robust baseline, a good verification and all sorts of technical skills apply, and careful monitoring and scrutiny because there will be people trying to try things on. But after a while practices will develop that are robust and can be trusted and the Executive Board will pass projects, methodologies will be improved and then investors will be able to look at that list and say, "Right, we will build a fund just to deal with these sorts of projects," and you watch the money flow into places that they would not otherwise go. It will be a lower risk investment to generate a certified emission reduction, which has currency in the rest of the world, than to take a risk of investing in some of the countries that are beneficiaries of these projects. Q333 Mr Challen: As it stands though would you say that the CDM is not the most effective way of channelling money into the least developed countries? Mr Cameron: At the moment the least developed countries will not be big beneficiaries in the CDM, no, I am afraid to say. They ought to be but they will not be initially. We are going to have to do a lot more work to make that system easier to use, more efficient and we may have to alter the rules to advantage the least developed countries. Q334 Mr Challen: You have been very sceptical of the entire concept of Business-As-Usual, largely I think because of its variability. How can you be so supportive of the CDM in that case, given the fact that it is essentially built on this baseline and credits approach which is at the heart of the Business-As-Usual concept? Mr Cameron: Baseline credit has its real value when it is connected to the cap and trade system, so the great beauty about the linking directive in the EU, connecting the EU scheme and the Kyoto credits, is that you create demand for these credits in the developing world. So what might start as a baseline and credit type system is given value by an absolute constraint. I am afraid I do believe that it is useful for the developing world as you bit by bit try to involve them in the taking of obligations under the Kyoto Protocol, the next phase. Baseline and credit is actually quite a good technique for bringing people on who do not have obligations today. Chairman: We have to move on, I fear, very quickly to Mark Francois. Q335 Mr Francois: The framework for post-2012, do you think that a post-2012 agreement needs to be based on the current Kyoto approach, i.e. national targets for states decided on the basis of political negotiations, supplemented by Emission Trading regimes, and what some people call Kyoto-plus? Mr Cameron: Yes. Q336 Mr Francois: If so, what aspect of the present treaty do you think needs to be developed or changed for a post-2012 agreement? Mr Cameron: In the written memorandum we go through a number of the options, which are currently being debated. I need to be careful that I am not being precious about it - you get very proprietorial about things you have negotiated, and I hope that that is not what drives my answer - but I do believe that Kyoto-plus is the only realistic way - and I cannot believe I am saying realistic, I am such an idealist by nature - of proceeding, yes, I do. It is not that the treaty system is anywhere close to perfect, nor that it would be impossible to create a complete alternative, but I do believe that there is sufficient momentum now in Kyoto to warrant concentrating effort in a post-Kyoto regime that is based upon what we have already agreed. That does not meant that it has to replicate; it is not just a question of going through the same allocation process and saying, "We are going to give you less next time and the following countries are going to have to carry the same burden as the first." I do not believe that we need to replicate Kyoto, but the next regime needs to have absolute targets that are meaningful and connected to the original obligation and Article 2 of the Framework Convention, the one that governs the whole system. They have to be able to accommodate the very rapidly industrialising developing world and will need to get over the developed versus developing world dichotomy, which it is of no value or relevance to the Climate Change debate - it just needs to go. So we need new categories of people under the original principle of common but differential responsibility, which is in the Framework Convention, and we need to get another category of countries to begin to reduce their emissions even on a relative basis, and I have a very optimistic view about that. I know what is going on in China and India and Brazil; I am not in the doom and gloom camp with those countries, they are already doing more in terms of policy put in place than many of the ODC countries. Mr Francois: You described yourself as an idealist and perhaps being an idealist tempered with realism is no bad combination, so thank you very much. Q337 Chairman: Thank you very much indeed. Unfortunately we have run out of time. It may be that the Committee has a few more questions and if so could we put them in writing? Mr Cameron: I would be delighted, and if other colleagues can assist on aspects of your questioning we would be happy to have our officers collect them together and present them to you. Examination of Witness
Witness: Professor Steve Rayner, James Martin Professor of Science and Civilization, and Director, James Martin Institute, University of Oxford, examined. Q338 Chairman: Professor Rayner, thank you very much for your patience and welcome to the Committee. I know that most of us have other commitments at five o'clock so we are very constrained for time, and I apologise to you for that. I can only repeat that if we keep our questions short and the answers brief we will get through far more quickly than otherwise. Do you have any opening remarks that you would like to make to us? Professor Rayner: I think probably in the interests of time I should forego my planned introduction remarks and merely say that I think there are four main areas that I do address in my written submissions to you. One is the issue of the realism and effectiveness of the Global Missions Trading Programme under the Kyoto Framework; the second one I think is the importance of Energy R & D, which I think is the missing part here. We are talking about pushing up the price of carbon, but if we are not creating the technologies at an affordable price that can come in underneath there then all we are doing is putting up the price of energy, and that is a significant issue. Thirdly, to emphasise the importance of addressing the whole issue of adaptation to Climate Change, both in order to protect vulnerable human and natural population, also as a mechanism to mobilise public values around the climate issue, adaptation being a much more tractable and accessible way into the climate problem for many people than emissions mitigation. Finally, if I have any single message it is for heaven's sake let us stop fetishising the single political instrument of the Kyoto Protocol and get on with the real job of thinking about how we move towards dealing both with the adaptation to the Climate Change, to which we are committed, and to the longer-term challenge of moving effectively away from a carbon based economy. Chairman: Thank you very much, and thank you also for your written evidence, which was certainly pugnacious! Sue Doughty. Q339 Sue Doughty: Thank you very much for that crisp introduction. In the point you are making there, where you talk about fetishising the Kyoto Process and also the point you are making about investment in R & D Energy, those points are very strong points; but do you think that there is anything else that a broader approach could cover beyond that? Professor Rayner: Yes. Where do I begin? I think there are two areas here which we often do not clearly demarcate to address. One is the whole question of emissions mitigation and the path away in terms of carbon emissions. The other is the problem of adaptation and actually meeting with the challenges of the Climate Change to which we are already committed. I think they require quite different approaches. Emissions mitigation does not quite honestly require the engagement of much more than about ten countries, the ones that really matter. Having an international agreement with 185 signatories is a very clumsy arrangement in fact, a very dysfunctional arrangement which inevitably leads to the lowest common denominator in terms of policy. On the other hand, I think that dealing with adaptation is going to require a much broader framework within which to act. Q340 Sue Doughty: Within the area of emissions mitigation, and this whole point that ten countries are responsible for most emissions, do you think that we should be focusing the attention on just getting agreements between those countries, rather than trying, as you suggest is a bad idea, for going for lots more countries who are not actually the main culprits in the case? Professor Rayner: I think there is a lot of room for bilateral and multi-lateral agreements among the arrangements that link together those leading industrial economies and emerging economies, particularly around the issue of energy technology. We think energy technology is the key here, as I said before. You can have a trading scheme, you can have a carbon tax, all you do essentially with those is put up the price. You are banking therefore on the notion that the technological innovation will be stimulated by that increase in price. As the previous speaker indicated, you could have a time lag of a decade, two decades before you start to get sufficient bite in there, to even begin to stimulate a reversal of the precipitous decline in Energy R & D that we have seen happen over the last 30 years, where we have seen a 50 per cent drop in both public and private sector investment in Energy R & D. Let us be clear here, we are not talking about inventing technologies de novo, we are talking about a suite of available technologies and enhancing them to the point where they are economic alternatives. Very often that means bringing them up to the point where they can actually be mass-produced at lower cost. The other thing that I think is important to emphasise here is that even an ideal market solution, if you believe in it, will not deal with the problem of the displacement of polluting technologies. With the exception of sperm whale oil the world has never abandoned an energy technology that it has used; we still use as much biomass on a global scale today - fuel wood and cow dung, which, incidentally, is very hard to see how you will get fuel wood and cow dung into a global Emissions Trading Programme, the monitoring challenges are quite remarkable. We still use as much fuel wood and cow dung today on a global scale as we did 100 years ago. So it is not just the question of bringing in new technologies at the top end, in the industrialised world, where you have some kind of a bite from a tax or permit system driving the price up, but how are we going to take those technologies out at the bottom that are highly carbon intensive? Basically what happens at the moment, you just simply relegate those down to being the technologies of default for the poor. Q341 Sue Doughty: Given your criticism of the feasibility of bringing in an international Emission Trading System, do you think that there is any chance of implementing a system that brings in traditional capital trade, or do you think that we are wasting our time even trying? Professor Rayner: I think cap and trade at a global level is a non-starter, for a variety of technical and institutional reasons, not least of which the one that you have already alluded to earlier this afternoon, which is the point that at a global level there is very little disincentive to countries to renege on the treaty if it becomes inconvenient. I think that is quite different from when you have something like the situation like the European Union where there are sufficient other ties binding those signatories together, that it makes it very difficult to exit from an agreement where you have basically lots of areas for pressure from other buyers in other countries. I think Emissions Trading can be useful at a regional level, where you have those stronger ties, but at a global level it is a non-starter. I think also that the notion of Emissions Trading could be very important domestically to sell to voters the idea that we are going to have to make some significant capital transfers in the form of technology transfer to less industrialised countries, to allow them to leapfrog the carbon intensive phases that we have actually gone through ourselves in the industrialised world. Q342 Sue Doughty: So given that situation it is all looking quite bleak. The UK has its agenda for the next year, 2005. What do you think the UK can achieve next year? Professor Rayner: I think whatever can be done to reverse this precipitous decline in energy in R & D would be really important. Basically there are again about ten countries in the world that perform the vast bulk of Energy R & D and clearly the G8 group represent the bulk of those. So I think anything that can move in that direction will be terribly important. This is not something that I think can be simply left to the private sector. Not only have we seen a decline in Energy R & D over the last 20, 30 years we have also seen that the private sector component of that has become much more conservative in that time than it was before. So I think this is something that would really be the key. I think the second thing is to develop this other tract, which is that of adaptation to Climate Change. Basically the problem of Climate Change, it seems to me, is very much one of how many more poor people in developing countries we are prepared to stand by and see go hungry, get sick and die young than we currently stand by and see go hungry, get sick and die young. And how many more species and marginal ecosystems we are prepared to say goodbye to? If you look at the very long haul one might say if you are not worried about either of those two categories we will just wait for indigenous technological change over the next 100 years to take us away from carbon anyway. So clearly the adaptation agenda and taking care of those vulnerable populations and those species is the other critical plank here. Q343 Mr Thomas: In that context I wondered what you would say about a need to engage the largest single emitter of greenhouses gases, which is the United States of America, because a global trading system is not engaging them, Kyoto is not engaging them? Do you think it should be the aim of the UK government to try to engage the Americans in some sort of global system, come what may, or, as you seem to have suggested so far, that it is not worth doing that and to try to find a different approach? Professor Rayner: As you may know, if you have looked at my biographical note, that in fact I spent over two decades living and working in the US, much of that time attempting to influence US government on their climate policy, with less success than I would have liked I might add. A few years ago I had the pleasure of advising a former environment minister in New York on this whole question of the US and one of the things I pointed out was that in the US the political culture does not in fact look to the Federal Government to take the lead on these kind of issues. Quite honestly, the Civil Rights Movement and Federal Government Scheme is an historical anomaly. For the most part American political culture is that the Federal Government is there to provide defence and basic infrastructure, therefore it is not necessarily the most promising point at which you would want to articulate policies of this sort, and in fact there is much more potential, as I pointed out at that time, to articulate with state governments. As I mentioned in my written submission, the State of California, de facto, can set appliance efficiency standards. Nobody is going to make a separate product for California and for the rest of the United States. You have the precedence where you see the States of New Jersey and New York produce very detailed primary action plans for their States, and indeed are involved in the development of a regional Emissions Trading System for the North-eastern Atlantic Seaboards in the United States. Those same States have also been making moves towards threatening litigation against utility companies to recover the costs of damages from greenhouse gas emissions. I think that the threat of litigation in many cases for US companies is actually one which carries much more weight than the risk of some kind of piecemeal federal legislation. So I think there is a lot of room to bring the Americans in but the trick is to do it without necessarily getting into a state of believing that you have to have the diplomatic nicety of having the US Federal Government sign up to the kind of arrangements that have been much more favourable in Europe. So I am actually optimistic about the ability to bring them in. Heaven help us, even ExxonMobil, Exxon which was for many years the primary one denying the science of Climate Change, has given up that line of argumentation and has currently invested 100 million in Stanford University for the development of new technologies. Q344 Mr Thomas: You have given us evidence along these lines and we have also had similar evidence that does show that the characteristic of the US has not been engaged in Climate Change is nonsense and there is a lot of research and development and there is a lot of individual State actions there. Professor Rayner: The science, incidentally, was developed in the US Department of Energy. Q345 Mr Thomas: Yes, a very useful website! How can we mix all this together into some kind of global approach because although you may not be advocating necessarily a Global Exchange Mechanism, is there not a need for some kind of global approach - because this is a global problem - that does show that the countries of the world are signed up both to the facts of Climate Change and to the need to take action on it. You have a more clumsy approach, if you like, but should we be trying to do it in some way, shape or form? Professor Rayner: I think certainly the Framework Convention is an important symbolic symbol. I was trained as an anthropologist, so when I say something is symbolic I am not dismissing it, symbols are terribly important foci. I think Kyoto can have some of that symbolic importance, although I think, as I said earlier, we have fetishised it as almost as an acid test, as "Are you pro or anti climate?" rather than, "Do you think that this is an effective mechanism for getting where we want to be?" I would favour a much more pragmatic approach generally. There was a stage in the development of the private regime where there were proposals for what was called a policies and measures approach, and basically that was an approach which allowed countries to declare what kinds of policies and measures for implementation of those policies they were going to follow, and to put in place a reporting mechanism. The importance of that is that it focuses on what countries actually do rather than commitments that they might make for some future emissions reduction period. It also has the advantage of giving us a range of strategies that can be applied from which there could be some worldwide social learning about what works well under what circumstances and what does not work elsewhere, or what might work in one place that does not work in another. So in other words, by having a broader set of strategies we may well actually learn how to deal with the issue much faster than this rather awkward and painstaking process of incremental reductions depending on building this rather elaborate trading scheme which is going to require a lot of technical monitoring and institutional finesse for it ever to pay off. Q346 Mr Thomas: You put a lot of emphasis in your evidence, and you refer to it now as well, on social learning and also on Research and Development. Turning in particular to achieving that, you would have heard the previous witness suggest that investment - and I assume from what he was saying that Research and Development was part of that - had been incentivised by clear targets and a clear political context to operate within those targets. You seem to be suggesting a much more fuzzy approach to all this. Can you be clear or confident that that would incentivise people to invest in the right technology to deal with Climate Change? Professor Rayner: I do not think it necessarily has to be fuzzy, I think it has to be much more multi-stranded and, in a sense, pluralistic. I think what I would suggest is that an analogy might be something closer to a Marshall Plan than to a market and I think if anybody had actually assisted on doing a benefit cost analysis of the Marshall Plan before its implementation we would never have done it. I think there are very few people around who would suggest that the world would be in a better shape today if we had not done it. I think you can do that in a way that actually does say to countries, "We want you to devise policies, we want you to declare your measures, we want you to set benchmarks and we want you to report on your progress against those benchmarks," and basically to have a regime that evolves in that way. Q347 Joan Walley: That is all very interesting, the way that we have been concentrating on the nuts and bolts of all of this, but I want to move a bit more towards hearts and minds in terms of how we are going to achieve this, how can we carry the public with us and have that political awareness? You say something quite interesting about taxation having drawbacks and suggested that it makes it an easy target for political opposition, simply because of its transparency. How do you reconcile that comment with the need for greater understanding, without which we cannot bring about any of these changes that we really need to see? Professor Rayner: My remarks on taxation are based on obviously very prominent things like the rebellion against petrol tax here in the UK and about President Clinton's attempts when he first went into Office to introduce some rather modest tax on energy, which was defeated politically as well. It is right to say that it is about hearts and minds and one of the things that I would emphasise, that I draw out of my written remarks, is that science is not going to tell us what constitutes dangerous Climate Change. It is quite wrong thinking to believe that science can tell you that here is the point at which you need to do something. Yes, there are spectacular things like switching off thermohaline circulation, and if we wait for that to happen as an indicator it will be way, way too late. So what is an adequate indicator? How many people are going to have to die? Well, we are already told that there is a very high level of deaths from diarrhoeal dehydration, malaria and so on. So basically it is not the science, it is going to have to be mobilising public values that is going to be the trigger. There, I am afraid, I am very sceptical that you are going to get widespread support around the world, particularly in the United States, for emissions mitigations at first step. That is why I wanted to advocate focusing on adaptation. If people in their communities, in their families, in their local landscapes identify something that is precious to them, and you can point out to them how that is going to be threatened by uncontrolled Climate Change, they then will have an incentive to mobilise, to try to protect that thing, whether it is a feature of the landscape, a building or whatever. In that process I think people are then empowered at the community level and at the local level and indeed by the individual level by the notion that there are things that they can do which will have traction on this Climate Change impact. They will also become aware that there are limits to the extent to which you can protect, and I think through that process you have the possibility then of the politicisation and it will lead people to say, "Now I understand the scene, how the mitigation agenda is not just something for government, it is not just something for big business, it is something that I actually have to get involved in and support and create the political will for government and big business to actually move in this direction." So although it may be counter-intuitive - and in fact for many years when I was living in Oak Ridge, Tennessee, in the United States, you could not talk about birth control with Southern Baptists because it was thought it would encourage experimental sexual behaviour, you could not talk about climate adaptation to environmentalists because they believed that it would perpetuate the idea that it was okay to keep emitting, and I think that was quite wrong-headed. I think counter-intuitively is where you can start to mobilise people on the ground. Q348 Joan Walley: That is helpful because I took it from your evidence that you were talking about taxation as one possible way forward, but if not taxation looking at Emissions Trading because it was less transparent, in a way, and might be easier given that there is not that immediate public recognition about what is precious and therefore how lifestyles have to change to maintain and safeguard what is precious, then we have to go down this other route. I just wondered where that fits in with your whole concept, which has come through very clearly in your evidence, that the real solution is this adaptation of new technology. Professor Rayner: I certainly did not want to give the impression that I am favouring carbon taxation. In that section of my evidence I was trying to outline what the alternative to an international cap and trading system might be. An alternative might have been some kind of international arrangements for carbon taxation; and then the third possibility is what I call variously the "clumsy approach" or more taking the policies and measures approach. Q349 Joan Walley: You talked earlier on about the Marshall Plan. Some of us on this Committee had the opportunity to meet Lester Brown in the not too distant past. I just wonder about our political and social institutions being adequate to be able to process the changes that are going to be needed and whether or not, with this whole emphasis that we currently have on short-termism, we can structure our societies to adapt to these things without something like the need for radical change, where we have no choice whatsoever but to adapt to some terrible catastrophic consequences? Professor Rayner: I am not quite catching the question. Q350 Joan Walley: The question is really how adequate are the political and social institutions that we currently have at the moment to deal with the scale of the challenge that we have if we are going to deal with the whole problem of Climate Change? Professor Rayner: I think the problem is that we do not actually engage a sufficient variety of our political institutions and particularly, if I may so, in the UK one of the things that rather shocked me, coming back from the US, was that I had forgotten over 20 years the extent to which there is in Europe generally and in the UK in particular a very strong culture that it is the government's responsibility to take care of everything. That is quite different, interestingly enough, from the general default cultural assumptions that you find predominating in the United States. So whereas in the US I think you might say that there is a deficit in government involvement in climate issues, whereas there is a fair amount really, relatively speaking, in terms of the philanthropical NGO sector on the one hand and business on the other, you might say that in the UK that we tend to focus too much on government putting all the pieces in place and not doing enough to engage the private sector and the NGO community in civil society in moving forward here on policy. Just as I would advocate for a more pluralistic approach at the global level I would say the same thing applies at the domestic level. Q351 Joan Walley: You say that our social and political institutions effectively have to change to be able to respond to this challenge that we face? Professor Rayner: I think we have strong institutions in government; I think we have strong business institutions. We are a bit weaker here on civil society but they are by no means absent. It is not that we need new institutions to come into being; it is that we need to engage all three sets of institutions in a more constructive way. There tends to be also - forgive me if I start sounding like an anthropologist here - when you are dealing in either of those sectors, a natural tendency to look for solutions in the direction of more of the problem that is wrong. So if things are not working out in the private sector basically you say, "We need to get the government off our backs and allow us to be more exuberant in our creativity," and the government will say, "No, we have to get the rules right," and the NGO sector, "We have to open up to more public participation." So in a sense each of those kinds of segments of society has a natural default bias to a particular set of policy strategies. My argument is in fact that the Emissions Trading Strategy, for example, in some ways purports to be a market strategy although in many ways it is a way of dressing up a regulatory structure in a way to make it more palatable to people with that sort of market bias. What we need to do is to recognise that we need to have policies that are advanced in using all three kinds of strategies. You just cannot rely on the market, you just cannot rely on the government and you just cannot rely on people to volunteer. If you can bring all three together you have a lot of creativity. Q352 Mr Francois: Professor, you talk about international competition as being as important as cooperation and about the need for wholesale modernisation in energy markets. How do you think governments can practically encourage that kind of activity? Professor Rayner: How can governments stimulate Energy R & D? Q353 Mr Francois: Yes, as one example of that. But your thrust was that you were talking about competition and you wanted to see wholesale modernisation in energy markets. How can governments help bring that out? Professor Rayner: Once again, I think there is a combination of things that need to be done there. One is the encouragement of genuine competition in energy markets; secondly, I think it is, if you like, the exuberant individualist strategy, but I think there is important room there for direct government investment in R & D, for providing tax incentives and other kinds of stimuli to the private sector to develop those technologies to the point where they are practical and affordable substitutes to fossil fuels. I think there is also much to be done in respect to communities in terms of popularising ideas about using energy more efficiently in the home, about stimulating moves away from large, gas guzzling cars to vehicles that are quite capacious and capable of 60 miles a gallon. To some extent the system of here in Britain where we have a road tax that is differentiated in relation to emissions is certainly a smart move in that kind of direction. Q354 Mr Francois: Also you refer to the threat of civil liability. I do not know if that is partly because of your experience in the United States. You talk about there being potentially quite a powerful incentive to reduce emissions. Professor Rayner: Certainly in the US, yes. Q355 Mr Francois: But is it not ultimately the threat of financial penalties to companies, whether it is through the courts or through compliance penalties associated with trading which are ultimately going to force them to act? Professor Rayner: I think clearly profit is what motivates companies, yes. Whether it is an incentive or whether it is a penalty ultimately you are looking at the bottom line. On the other hand, I think once again it is not companies that are the only actors; there is also huge potential for changing the kinds of demand that companies are responding too. For instance, we are beginning to see the emergence of the sort of celebrity elite who are competing with each other for whose car gets the most miles to the gallon rather than whose car gets from 0 to 60 in the shortest possible time. The interesting thing about that is that you are still having competitive consumption, you are not turning around to people and saying, "Change your entire world view," but you are changing the things which people are competing about and things which are environmentally damaging to things which will bring about environmental improvements, and there is a lot of room to do that on the demand side as well as on the supply side with companies and so on. Q356 Mr Challen: I would like to briefly return to the issue of developing countries, which we touched on earlier, because certainly the comments you were making you were not entirely comfortable that trading was going to be effective in view of the problems with developing countries. We were discussing some of the things that we are not even touching on at all, as you were saying, about burning wood and dung. What more should be done in terms of capacity building, to look at those countries where really, according to you, we are not going to make a lot of impact? Professor Rayner: Let me be clear, I do not include China and India as countries that are not making a lot of impact; they are going to make a huge impact. Q357 Sue Doughty: The less developed countries. Professor Rayner: There are a lot of countries, both developed and less developed, that are not presently or in the next 50 years likely to be the major contributors to greenhouse gas emissions and build-up of concentrations. With respect to major developing countries, particularly China, India, Indonesia for reasons of population and coastline, and Brazil because of its forest resources and its particular place in Latin America, are going to be terribly important countries. One of the interesting things is that we have seen a remarkable growth in China over the last 20 year, which has happened without the increase in carbon intensity that we would have predicted 20 years ago. It is still considerable but it is much less than we had actually anticipated. If we look at India, it is a country which actually has a fairly considerable indigenous technological capacity. There are all manner of opportunities where we can cooperate with those countries - Brazil is another one with major technical capacity - to develop paths which will allow those countries to have their economic growth without the kinds of levels of carbon intensity to which they would be committed if they were to proceed with the kinds of technologies that we would have taken for granted 20 years ago. Q358 Sue Doughty: Looking at the less developed countries, the ones following on behind them, some way behind them, what can we do there? Professor Rayner: I think the truth of the matter is that those countries need to be supported in their development and that will mean that if they are not to simply follow in the path of becoming this lowest level where, as I mentioned earlier, the default technologies that everybody else has given up become deposited; that we are going to have to have to make some positive decisions to transfer technologies and invest in more cutting edge technologies in those countries than would otherwise be the case. In other words, we are going to have to make some capital transfers, but I would like to see those capital transfers made in technology, not in cash - cash has a way of leaking out of the system, unfortunately. Chairman: Thank you very much indeed for this interesting session and to thank you also for your witness submission - it was interesting to read. |