Memorandum submitted by the Environment
Agency
SUMMARY
HM Treasury plays a critical role in delivering
the government's environmental and sustainable development objectives.
— The Pre-Budget Report (PBR) itself
announced little new environmental policy, but HM Treasury's contribution
to environmental objectives needs to be assessed across the range
of its levers on policy—including the Budget, Spending Reviews
and appraisal methodologies (see section 2).
— We believe that HMT could be more
ambitious in the use of economic instruments and should aggressively
pursue "resource efficiency" both as environmental policy
and as a part of its wider productivity agenda (section 3).
— The Environment Agency strongly supports
better regulation and has championed modern "risk-based"
regulation. The announcement of a review of "gold-plating"
is potentially valuable, but only if it takes a discriminating
approach to regulation, which can often be the lowest cost and
most effective away to meet objectives. There may be good reasons
for domestic regulation to go beyond that negotiated in the European
Union or to adopt the broadest interpretation of directives (section
4).
— The related announcement of the response
to the Barker review on housing has important and as yet unresolved
consequences for flood risk, environmental impact and infrastructure
demands. It is important that these issues are given substantial
emphasis in the review on infrastructure needs announced as part
of the PBR; further development of planning guidance in flood
risk areas; and the consultation on the Planning Gain Supplement
(section 5).
— The Committee has asked for views
on economic aspects of climate change, particularly in the context
of the Stern review. We have great concern about any highly reductionist
or mechanistic approach to climate policy. However, it is the
proper role of economists to define the utility, weaknesses and
limits of techniques such as discounting and monetarisation. The
Stern review is likely to consider such issues in some detail.
Economics is an important discipline informing the response to
climate change, but the principles of sustainable development
provide a broader framework in which economic analysis should
be embedded (section 6).
1. INTRODUCTION
The Environment Agency has a statutory duty
to protect and enhance the environment and to make an appropriate
contribution towards achieving sustainable development.
Parliament has also given the Environment Agency
a general duty to assist in the delivery of environmental priorities
by advising on the development of environmental policy and to
promote an understanding of methods for environmental protection
and management. This memorandum is provided as part of our efforts
to perform these functions.
2. THE ENVIRONMENTAL
ASPECTS OF
THE PBR
The PBR (Chapter 7) contains several new or
recent measures. We comment briefly on these below:
PBR measure
| Environment Agency comment |
Support for alternative sources of energy including further consultation on carbon capture and storage, collaboration with Norway on this technology, and additional funding for Carbon Abatement Technology demonstration;
| Carbon Capture and Storage is a potentially important component of the national and global response to climate change. A December 2005 report by the Intergovernmental Panel on Climate Change gave a cautiously optimistic assessment of the potential for the technology. However, it has not yet been proven on a large scale in power generation.
|
Further measures to improve energy efficiency, through the proposed Green Landlord Scheme and £35 million for the Carbon Trusts, to provide interest free loans for the introduction of energy-saving measures in the business and public sectors;
| It is important to address energy use in the public and business sectors. However, the Carbon Trust had proposed a more ambitious approach based on an economic instrument. We hope that the Climate Change Programme Review and Energy Review will develop a more aggressive approach to energy efficiency.
|
Continuation of the freeze in main fuel duty rates and the duty rates for road fuel gases, due to continued oil market volatility;
| We accept the argument that rising market prices can have some of the environmental impact of escalating taxes. However, the important objective is to send long-term signals that motorists and other transport users should expect rising costs reflecting environmental impacts and imperatives to meet challenging climate change objectives. This is important to stimulate long-term changes in the pattern of use and design of vehicles. It is not clear that this signal can be separated from the noise of price volatility at present, and the introduction of congestion pricing should not signal a weakening of environmental objectives.
|
Commitment to introduce a Renewable Transport Fuel Obligation and enhanced capital allowances for the cleanest biofuels plants, to stimulate the development of alternative fuels;
| It is important that the full life-cycle environmental impacts are considered in biofuels policy and different bioenergy sources have markedly different life-cycle impacts. It is important that some quality control accompanies this policy to ensure that it does not make the total environmental impact worse.
|
In support of the UK's continuing leadership in tackling the international challenge of climate change, progress on taking forward the Gleneagles Plan of Action agreed by the G8 under the UK's Presidency and the Stern Review on the economics of climate change;
| We support international action and engagement with major emitters as long as this is additional to and complementary with the Kyoto Protocol process, which these initiatives are.
|
Progress towards the inclusion of the aviation sector within the EU emissions trading scheme (ETS).
| We agree that bringing aviation into the climate change policy arena is both critically important and a challenge. The impact of the inclusion of aviation in the emissions trading system will depend on what allowances are allocated to airlines. If airlines are allocated business-as-usual allowances, it will have little effect. It is the toughness of the cap that determines the environmental outcome, not its inclusion in the ETS per se.
|
| |
The measures detailed here and the wider account of environmental
policy provided in the report reflect quite cautious policy-making
to date. The next 18 months allow for greater ambition in environmental
policy-making through:
— The Budget 2006 and 2007.
— The Comprehensive Spending Review and related
processes.
— The environmental and infrastructure aspects of
the more aggressive post-Barker sustainable communities plan.
— The Climate Change Programme Review, Energy Review,
and Stern Review of climate change economics.
— The forthcoming waste strategy.
— The beginning of the implementation of the Water
Framework Directive.
— Implementation of the government's Sustainable
Development Strategy.
3. THE TREASURY'S
ENVIRONMENTAL FISCAL
STRATEGY
The Committee asks "how the Treasury's environmental
fiscal strategy could be improved (including the adequacy and
effectiveness with which all new budgetary measures are appraised
and existing economic instruments are monitored);"
The government has introduced several important and successful
environmental economic instruments. However, we believe this is
still an unnecessarily tentative approach. More ambition can be
justified and would be consistent with other government economic
objectives, such as improving productivity. Opportunities include:
— A tougher cap in the second phase of the national
allocation plan for the EU ETS, with a better implementation of
the polluter-pays principle in the approach to allocation, with
auctioning of allocations where appropriate.
— Revalorising the climate change levy and making
it carbon-based—there is an opportunity to consider this
in the Energy Review.
— A steeper fuel efficiency gradient for vehicle
exercise duty including the introduction of "feebates"
if the aim is to sharpen behaviour change incentives whilst maintaining
revenue neutrality.
— Some form of long-term signal on fuel duty or
the cost of motoring, similar in concept to the now-abandoned
fuel duty escalator.
— Economic instruments that support sustainable
consumption and production, notably by incentivising greater activity
in the upper strata of the waste hierarchy. At present the economic
signals create incentives to divert from landfill to mass burn
incineration, but there are few economic signals that incentivise
diversion from incineration to recycling, reuse or to reduced
waste volumes through more sustainable production and consumption.
— Policy packages to address diffuse pollution,
which could include taxes or levies on agricultural inputs, with
revenues directed to funding reduced pollution in ecologically
sensitive areas.
— Charges for water abstraction (beyond cost recovery)
and compulsory metering in water-stressed areas.
— Economic instruments that favour resource-efficient
buildings (in terms of water, energy and waste), both encouraging
new-build to the highest voluntary standards and incentivising
retrofit of the existing stock. There are several options for
achieving this.
— A new review to identify and phase out residual
subsidies to environmentally damaging activities.
In terms of policy appraisal, there are several approaches
that would be helpful:
— A proper "invest to save" approach to
measures designed to improve resource efficiencies (for example
building regulations) that takes full account of life-time social
and environmental costs. Paying a higher up-front cost can often
create considerable long-term savings in running costs—in
financial terms and impacts on the environment. This should be
consistent with the "Green Book" policy appraisal methodology,
but does not appear to be rigorously applied to policy appraisal
in practice.
— The use of Strategic Environmental Assessment
more widely than strictly required by the relevant EU Directive,
for example in assessing major programmes such as the sustainable
communities.
— A new effort to codify the government's five principles
of sustainable development into economic appraisal methodologies.
Data on the effectiveness of existing economic instruments
(including those in use in both the UK and overseas) is important
in designing future policy. Knowledge of elasticities, revealed
prices and preferences, displacement effects and unintended consequences
represent valuable insights and should be monitored carefully.
The Environment Agency is working as part of a consortium for
the European Environment Agency to develop a methodology to evaluate
existing instruments, and to pilot learning from existing practice.
The results of this study should be used to inform future policy.
4. BETTER REGULATION
The Environment Agency has invested in modernising regulation,
and has pioneered risk-based regulation and efficient delivery
of legislation whether derived from the EU or nationally.
The Chancellor has announced a review of "gold plating"
in the implementation of EU legislation, to be led by Neil Davidson
QC. European law is the source of much environmental regulation
in the UK. Given that EU legislation is often the product of compromise
rather than optimum design, there is a good case for examining
where to place the appropriate emphasis in designing implementation.
Whilst the government must ensure that it acts legally in complying
with EU legislation, there may be some areas where it can undertake
a minimal compliance approach and others where it should take
the broadest and deepest interpretation of the obligations. The
objective should not be to seek out the most minimal approach
to compliance in all cases, but to take a more discriminating
interpretation based on UK priorities.
In some areas, there may be a case to go beyond the requirements
of EU legislation and to exercise national discretion to take
stronger measures. For example, the UK has adopted a climate change
objective of cutting carbon dioxide emissions by 20% by 2010,
though the UK's negotiated share of the European Union's Kyoto
Protocol target [1] is
only a 12.5% cut in all greenhouse gases. In tackling "gold-plating",
EU legislation should be seen as a floor determined through
negotiated compromise, not a ceiling. In areas where the changes
caused by regulation are cost-effective and not trade distorting,
there is a good case for the UK going further than the minimum
required. This could apply to energy efficiency measures and other
resource efficiencies. In the case of the Energy Performance of
Buildings directive (2002/91/EC), the UK appears to be under-investing
in implementation (perhaps "tin-plating" the directive:
the opposite of "gold plating") and some of the environmental
and economic benefits of improved energy efficiency will be lost
as a result.
There is also a good case for rehabilitating the tarnished
reputation of regulatory approaches. In the right circumstances,
regulation can reduce transaction costs, avoid free-riders, overcome
market failures like information asymmetries, and provide clear
signals about the future public policy framework to investors
and R&D functions.
5. SUSTAINABLE COMMUNITIES
The PBR announcements also addressed the proposed increase
in housing investment. The Chancellor announced reviews of the
infrastructure needs associated with the increased house-building
objective; a review of the planning system to be led by Kate Barker;
and a consultation on a proposal for a Planning Gain Supplement.
All will be important in ensuring the programme complies with
sustainable development principles.
New development brings cumulative environmental pressures,
for example from the individual and combined impacts of flood
risk, water quality, water resources, and waste. We know that
the trends and patterns of consumption are already significant
for the environment. For example, the domestic sector uses 57%
of the water put into supply by the water companies. Water demand
per person has increased by 11% between 1992 and 2003. This combined
demand from new and existing homes needs to be set against the
backdrop that parts of the south east are already abstracting
10% too much water in dry years, and that climate change scenarios
are pointing to longer dryer summers.
The impact of the growth will depend on a range of factors.
Depending on where they are located and the standards to which
they are built, planned new housing has implications for water
resources, water quality, and flood risk, as well as waste management
and air quality. As our understanding of climate change develops,
it is important that homes are not built in places that will be
at risk in future or create excessive long-term liabilities for
flood defence or other infrastructure. Of particular concern is
the location of housing in areas of flood risk and where water
quality and water resources are already stressed. Therefore the
Regional Spatial Strategies are the opportunity to balance the
investment needs with those of the environment.
We also look to the Treasury to support better demand management
of natural resources. The demand for water created by new and
existing homes could partly be met through improved standards
of water efficiency. This would reduce the need for costly infrastructure.
If high water efficiency standards are applied to all the one
million new homes planned for the South East of England this could
save 60 million litres a day—enough to supply water for
500,000 people.
Finally, accelerated development in the South East of England
will stretch the capability of some environmental infrastructure
to cope. For example, we have estimated that up to 80 sewage treatment
works will need to be upgraded in the South East to service the
demand from new and existing housing being discussed on the draft
SE Plan. Depending on the levels of municipal waste produced,
up to 50 waste treatment facilities may also be required to handle
waste by 2030.
These basic services must be properly integrated into any
plans for new housing, so investments are anticipated, co-ordinated
and made in advance. This makes the infrastructure review critical
to ensure that the necessary environmental investment requirements
are identified. However, new investment in infrastructure should
not replace greater efficiency which, as noted in the case of
water use above, can greatly reduce the pressure on the environment.
6. ECONOMICS OF
CLIMATE CHANGE
The Committee has asked for views on the following: "in
the context of the Stern review, the adequacy of conventional
economic analysis (including the role of monetarisation, and the
use of discounting) as a means of evaluating the long-term environmental
impacts of climate change."
The Environment Agency has responded to the Stern review
and can provide this submission if the Committee would find it
useful.
In summary, we are sceptical about overly rigid and mechanistic
economic approaches to a climate change or the environment more
generally. For example:
— Discounting is used to capture time preferences,
but a single discount rate does not adequately capture the subtlety
of human preferences. Even at a purely technical level, there
is good evidence from behavioural economics that time preferences
change depending on the time horizon considered (generally lowering
further into the future) and so require the use of "hyperbolic
discounting" techniques. These variations in assumed time
preferences over the periods relevant to climate change can make
a significant difference to any appraisal, but are not always
applied in climate change economics.
— There are important questions about the validity
of applying discounting over long periods such as those applicable
to aspects of climate policy. When applying discounting beyond
the personal horizon of the person or society making the appraisal,
there is the clear danger that today's generation will not give
adequate weight to the preferences of the future generations—perhaps
for resources that may be irretrievably lost or irreversible environmental
changes.
— "Monetarisation" allows for environmental
services and resources to be included in appraisal techniques
such as cost-benefit analysis. As such, it can be a useful analytical
and investigative tool. However, great care is needed in use of
such methods to make decisions. Valuation methodologies may end
up comparing the incomparable when environmental services cannot
be substituted for traded market goods or services.
— The use of monetary valuations in environmental
decision-making also risks accentuating environmental inequalities,
as poorer people often have lower revealed or stated preferences
for environmental amenity. In some applications of economic appraisal,
lower "value of statistical life" estimates have been
used for assessing climate change impacts on developing countries.
Whilst there is an "efficient" economic rationale for
this, it underlines the importance of maintaining distributional
objectives in policy-making.
— Much of the modelling in climate change economics
has ignored uncertainties (or caveats them in the fine print)
or makes mechanistic assumptions about the response of the climate
to the rise in greenhouse gas concentrations. The problem facing
society is of making policy decisions under conditions of very
considerable uncertainty, where there are rising probabilities
of extreme events or non-linear and fundamental system changes.
The principles of sustainable development recognise "environmental
limits", which are thresholds beyond which the consequences
are unacceptable, and the science-based and precautionary approach.
The Environment Agency believes that the principles of sustainable
development should provide a context in which economic techniques
can be applied more narrowly, for example in defining the most
cost-effective mix of mitigation approaches or the optimum adaptation
investment.
It would, however, be wrong to regard economics as of little
value in climate change policy. There is a rich literature on
environmental economics exploring the usefulness and limits of
these techniques, and many economists are well aware of the problems
of crude approaches to discounting and monetarisation. We expect
that the Stern review will provide a valuable synthesis of the
state of knowledge in this area and contribute usefully to the
development of climate change policy in the UK and internationally.
January 2006
1
The Kyoto Protocol gives the European Union a "bubble"-a
reduction of 8% in greenhouse gases. The EU determined the targets
for each member state within this bubble. Back
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