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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 882-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENTAL AUDIT COMMITTEE

 

 

PRE-BUDGET 2005

 

 

Wednesday 8 February 2006

MR CLIVE BATES

PROFESSOR PAUL EKINS

Evidence heard in Public Questions 88 - 172

 

 

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Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 8 February 2006

Members present

Mr Tim Yeo, in the Chair

Mr Martin Caton

Colin Challen

Mr David Chaytor

Lynne Featherstone

David Howarth

Mark Pritchard

Mr Graham Stuart

Dr Desmond Turner

Mr Edward Vaizey

Joan Walley

________________

Memorandum submitted by Environment Agency

 

Examination of Witness

 

Witness: Mr Clive Bates, Head of Environmental Policy, Environment Agency, gave evidence.

Q88 Chairman: Welcome to the Committee. Thank you for coming along. A general question to start with: we had the publication last week of Avoiding Dangerous Climate Change with a very strong message in there about the urgency of the whole issue and the need for very decisive action to tackle emissions. As a general point, do you think the Government is responding adequately to warnings of that sort?

Mr Bates: No. We have quite ambitious targets for reducing greenhouse gases. We have a target of reducing carbon dioxide emissions by 20 per cent by 2010 by making serious inroads into a much more ambitious target for 2050, but we look as though we are in danger of missing those. It is not necessarily the end of the world to miss a target as long as you are trying as hard as you reasonably can to meet it. At the moment we are not putting in the efforts necessary to try to meet the target for 2010. The Climate Change Programme Review, which is imminent but much delayed, may get us back part way on to course but at the moment the feeling seems to be that we are going to miss that and we are not really going to grip the climate change issue to the extent that we probably should.

Q89 Chairman: Looking specifically at taxation issues, you said in your memo that the Treasury has been "unnecessarily tentative" and "could be more ambitious". What has gone wrong? Why do you think they are being so feeble?

Mr Bates: We have some sympathy with the Treasury. These are difficult issues and there are competitiveness concerns and so on. There is a wide variety of constraints they have to take into account. However, they did have a very strong statement of intent around environmental taxation, fiscal instruments in both 1997 and 2001 and there is a very compelling economic case for using these instruments to drive what is sometimes known as resource efficiency or resource productivity that stands up impeccably both on environment, economic and social grounds, it is an excellent sustainable development approach. Fiscal instruments could be used more aggressively to drive that along in the areas of energy, waste and water as well, but more generally an approach that says there are investments that can be made now that will either lock in or avoid large environmental impacts, perhaps over the next 100 years or so. We need to think very carefully about getting the optimum pattern of investments now and that often means changing the incentive framework that people making investments are facing so that they take the long-term into account and we get properly internalised external costs looking over the long-term. I think they have fallen rather short of doing that as aggressively as they could and as aggressively as the economics justifies.

Q90 Chairman: You mention the competitiveness angle but do you perhaps think they were deterred by the public reaction at the time of the fuel protest in 2000 and that was the reason why they have backed off with the fuel duty escalator? Do you think that kind of public reaction has been a more general factor in warning them off?

Mr Bates: I cannot imagine a politician who would not be influenced by that, to be honest. It would be quite wrong to be indifferent to that sort of public reaction and the imminence of crisis that actually caused. Whether you should go from that to a different approach to fuel duty or a different approach to energy security follows less directly from being concerned about what happened. Slightly off the brief of the Environment Agency, there were a number of issues around those protests and blockades: why were those blockades successful; why was essentially a form of energy security risk allowed to persist as long as it did as well as the cause and grievances that the protestors actually had?

Q91 Chairman: Do you think they have got a coherent strategy at the Treasury in terms of how to use environmental taxes and incentives or are they just following an ad hoc kind of approach?

Mr Bates: The material that is written on environmental tax and fiscal instruments is very well thought through. The 2001 report on environmental tax is a very good standard text on good practice in environmental fiscal instruments and decision making, squaring off the other objectives they have as well. The question is whether that agenda is pursued with the same vigour as, say, the productivity agenda is pursued by the Treasury, which is pursued very vigorously, or macroeconomic stability which is pursued very vigorously. Our sense, and the reason we put this in the evidence, is it is not pursued quite as aggressively as that although there are good reasons. For similar reasons to the conventional productivity agenda there are good reasons to pursue that more aggressively than they have done. A little less caution and a little more reflection on the fact that almost every time a regulation or fiscal instrument has been introduced in the past, prior to it being introduced there have been prophets of doom, imminent collapse of industries, everywhere will close and go offshore, and more often than not that has not happened after the event, we have actually ridden these instruments quite well, assimilated them, and we have got the environmental outcomes we were searching for. There are great case studies around the efforts to reduce ozone depleting gases, for instance. There was a huge amount of concern prior to the Montreal Protocol and European Union measures being introduced that it would flatten the industry but, in fact, in the end it caused a bit of a renaissance in parts of the chemical industry with new products.

Q92 Mr Stuart: In your memo to us you say that the impact of the Treasury on the environment should not just be assessed on explicit environmental policies but on the whole range of its activities. How well do you think the current format of the Pre-Budget Reports presents such an assessment of the Treasury's overall environmental impacts?

Mr Bates: The thing at the front of my mind in that memo, at least when it was being written, not necessarily when it was being read, was the idea that the Pre-Budget Report itself is not necessarily the way that the Treasury should be judged, there are other things that determine environmental outcomes, like the Budget, the Spending Review, the Public Service Agreements and policy conditionalities that go with public spending, like the Green Book on investment appraisal and so on. The totality of those approaches in pure environmental terms is what they should be judged on. As I said to the Chairman, I think they have been less aggressive in that area than they could have been. To pick up the point there, the Treasury has a lot of influence over a lot of major policy areas that have environmental consequences but are not in themselves environmental policies, notably transport and housing. If you take the agenda for expanding house building primarily in the South East, the prime driver of that is, quite rightly, or it is an important policy objective, affordability of adequate housing supply to support the economy in the South East. The question is whether enough attention has gone into that to ensure that the environmental consequences, the consequential environmental expenditures, flood risk, water infrastructure and so on, are adequate to make what we would generally call sustainable communities out of the housing that is going to be built. Whether we have got the development of the Thames Gateway right, again it is being driven for affordability and increasing capacity of London reasons but there are some pretty serious environmental consequences around building in areas that are at risk of flooding or will have these extra costs. Unless it is not necessarily done explicitly, it would be a good discipline to submit that kind of policy thinking to strategic environmental assessment type disciplines. Even if it is not a pure strategic environmental assessment it would be good to have that kind of discipline in the same way that there is a Regulatory Impact Assessment that goes with that sort of policy.

Q93 Mr Stuart: As we are dealing with the Pre-Budget Report and as it is an important part of the way the Treasury puts its policy out, do you think that the way the environmental issues are compartmentalised in Chapter 7 is the right way for the Pre-Budget Report to deal with that?

Mr Bates: It is definitely useful to see a summary of environmental measures in Chapter 7 and I would not want to lose that. It would be good to see more discussion of environmental consequences brought out in the other chapters. I would not want to lose that chapter in the Pre-Budget Report.

Q94 Mark Pritchard: Obviously you are aware of Sir Nick Stern's review, I just wonder whether you feel that the remit of the review is too narrow?

Mr Bates: Crikey!

Q95 Mark Pritchard: I suspect from your earlier answer you are slightly frustrated that we are having another review on top of other reviews.

Mr Bates: Actually, no. I think there has been a lot of concern about Nick Stern's review and will it just be one of these American-style global cost benefit analyses. He released his initial thinking on 31 January in his speech in Oxford and it is excellent, an absolutely first rate assessment of the problems in climate change economics taking a very wide perspective, a thorough understanding of the intergenerational, intertemporal issues, uncertainty, irreversibility, precautionary approaches, the global collective action challenge and so on. He has deployed all the broadest concepts of economics in thinking about the issue. His speech sets out a new framework for thinking about this and they are consulting on that again. All of us in the Agency have been very pleased by the approach that he has taken, we have had good contact with the team, they are extremely open-minded and, as far as we can see, they are doing the best job they can with the resources and time available. There is really nothing but optimism about the Stern review from our side.

Q96 Mark Pritchard: Do you see a contradiction between this short-termism of conventional economic analysis as against the medium to long-term issues of climate change?

Mr Bates: Yes, but with the proviso that I do not think Nick Stern's review is falling into that trap. You are very right, tools that are useful in conventional financial appraisal of projects, such as discounting cost benefit analysis, discounting cash flow analysis and so on, do not work so well over longer time periods when there is uncertainty about the outcomes but there are non-monetised impacts, externalities and so on and where you cannot trade one type of good human capital with others, natural capital for instance, those techniques break down. There is a very rich literature on this in environmental economics. It is something that is useful as long as it is not seen as paramount and determining the outcomes. It can often shed useful insights on problems but should not be used to determine in the final analysis what is done. The sustainable development strategy framework is probably a better basis for doing that.

Q97 Mark Pritchard: I was recently in Denmark with the rest of the Committee and we met the head of the European Environment Agency while we were there, coincidentally. I understand you are working with them to look at progressive and regressive taxes and, indeed, incentives for feeding into the Treasury team here. How are you progressing with that?

Mr Bates: What they do, and do supremely well, is save us and everybody in Europe a great deal of effort in understanding what is going on in all other European countries. In a way that role is one that it was set up to do, so we can take advantage of understanding all the various fiscal instruments that are in use around the EC. We do not really have to try hard to embed their work because it is inherently useful. It stands on its own merits and it is very convincing and useful. It tends not to make big judgments and policy prescriptions, it is a sort of information sharing, co-ordinating action. It allows us to benefit from understanding what is done in other countries which is always very useful and quite difficult to do from a position here in the United Kingdom.

Q98 Mark Pritchard: I am interested that your emphasis was on fiscal rather than taxation.

Mr Bates: I do not think I was making a big point there. I would rather stick to economic instruments in the broadest sense, including trading, permitting, taxes, rebates, whatever.

Q99 Mark Pritchard: In the UK Sustainable Development Strategy, which as you know is quite well advanced, how do you think Britain is placed within the European Union vis-à-vis sustainable procurement in the context of the target of 2009?

Mr Bates: I do not think I can answer that question. I do not know how well other countries are doing on sustainable procurement. I do know that we have a Sustainable Procurement Task Force and this is a subject that is in perpetual discussion. There is no shortage of attention to looking at how we can make the procurement approach more sustainable. On the other hand, there is a danger sometimes that you can end up loading costs into procurement, that you can end up using it as a sort of policy instrument that in a way does not necessarily provide good value for the taxpayer.

Q100 Mark Pritchard: My final point would be the Office of Government Commerce has 22 criteria for best value for money, do you think there should be greater weighting for environmental value for money within Government?

Mr Bates: Greater or not I do not know, but there should be higher weighting for it. The reason is that we value the environment even though we do not necessarily pay for it. In a proper robust approach to value for money you have to take into account things you value but you do not necessarily pay for. If we are trying to get value for money out of the system we should certainly include environmental value, monetised or not, in the calculations that are used to assess value for money from procurement.

Q101 Mr Caton: Could we move on to regulation. In last year's Budget and, indeed, in the Pre-Budget Report we are discussing now, the Government focuses on what it describes as "gold-plating" of EU regulation and wants to avoid or remove that. In your written evidence to us you seem to be saying that sometimes gold-plating is not only appropriate but very valuable. Can you tell us where the areas are that you see a strong case for going further than EU legislation?

Mr Bates: First of all, I think gold-plating is a value laden term. Almost by its very definition it says that gold-plating per se is unnecessary. There are cases where it might be advantageous to go beyond the minimum agreed in European Union legislation where the Single Market allows for that. That is because European Union legislation is formed through negotiation and compromise and it may not always set itself at the level that is optimum for the United Kingdom, so where we have flexibility we should be able to exercise it in the direction of increased power and potency in regulation if we think that is appropriate. That is a general observation that is about the way European Union legislation is made compared to what we have as interests. In those directives that deal with resource productivity and resource efficiency, so things like the Energy Performance in Buildings Directive, we know that we can get cost-effective environmental, economic and social benefits out of greater efficiency in buildings. We know that buildings account for about 40 per cent of energy use in the United Kingdom and we know, therefore, they are an area where we should be prepared to be quite aggressive with policy because we know that most of the investments that would reduce energy consumption are cost-effective but face all kinds of other barriers. A piece of legislation like the Energy Performance in Buildings Directive could be one area where we could go beyond the minimum required of us and get better value for money for the occupants of those buildings and for the state and the environment as a whole. Other areas might be the Environmental Liability Directive forthcoming, or currently in the process of being implemented. It is quite restrictive in the areas to which it applies. I believe it applies to those areas covered by the Habitats Directive which is quite a narrow subset of all vulnerable and important environments in the UK. If we felt it was right in England and Wales to extend the coverage of that Directive to cover SSSIs, National Parks or whatever, then there might be a good reason for us to do that, but it would not be gold-plating, it would be doing the right and rational thing taking European Union legislation as a minimum. I hesitate to get too far into this but the OPR approach, which potentially puts additional burdens on business for reporting environmental and social impacts, again there might be a reason for doing that even though we do not have to do as much as the OPR approach was proposing compared to the EU Directive that sets a minimum standard because we want to have consistent standards across the board because we think from the Environment Agency's point of view if we get better self-control by companies, better management within companies, it is easier for us to take a lighter touch risk-based approach to regulation. Better governance amongst companies - even though that may impose a cost on them - can have a consequential reduction in cost and burden, avoid free riders and avoid essentially penalising those companies that would do this kind of thing anyway and it would be good practice. That is a possible area, but that has been dismissed on gold-plating grounds.

Q102 Mr Caton: Are you worried that hidden behind this gold-plating description, there are pressures within government to water down environmental legislation?

Mr Bates: I do not think we have got any evidence that is the reason. I think the concern is that there are large regulatory burdens which often have their origin in European Union legislation and some of these do not deliver value for money. It is a legitimate concern for us. I think the Environment Agency has been at the forefront of modern regulation, trying to take a risk-based approach, a light-touch approach, to regulation. We have been commended by the Hampton Review and so on for taking that approach. The question is: is the style of legislation coming out of Brussels, out of the European Union, going with that flow? Is it going with that modernising approach? We can feel perhaps that we would be over-regulating some cases, or regulation could be too proscriptive if it was not modernising in that sort of way.

Q103 Mr Caton: From the Environment Agency's point of view, how well do voluntary agreements work compared to mandatory regulation? Perhaps you would like to talk about the voluntary agreement on pesticides?

Mr Bates: Yes. I think the right approach to voluntary agreements is a steel fist in velvet glove sort of approach, in which there is essentially a bargain or a contract with those volunteering that makes it a little less voluntary than the title suggests. The voluntary initiative on pesticides is very much driven by a concern in the industry not to have taxation and regulation as the prime response. The voluntary agreement we have been pleased with; it has worked well, we have got a 19 per cent reduction in pesticides in rivers, and that is quite a result from a voluntary agreement on something that is so diffuse and difficult to intervene with. I think we will be content to see that voluntary initiative proceed as long as it continues to deliver results, it expands its coverage, it covers more of the polluters, more of the land area, and it does not start to make big calls on public finances. As soon as it starts to look as though it is costing or we need programme spend to go along with it or we are getting a free riding problem and those who are volunteering are doing well but those who are not participating are free riding on the efforts of those, then the case for intervening with some kind of levy or tax on pesticides, and using that to fund a programme that has more mandatory or obligatory aspects to it, becomes stronger. I think we want to keep that prospect in place while the voluntary agreement is proceeding because I think that is what will drive it along and make it successful.

Q104 Dr Turner: You advocate changes to the Climate Levy. You say it should be revalorised. Perhaps you could explain what you mean by "revalorised", because I remember that as a kid as a kind of paraffin heater. The Treasury says there is no need to increase the tax because it is exceeding the targets for reducing the emissions as a result of the tax. What is your view on that?

Mr Bates: I think if you introduce a tax like that, then all revalorising means is allowing it to keep up with inflation. At the moment the tax is declining in real terms because of being kept flat in nominal terms.

Q105 Dr Turner: Indexing its value?

Mr Bates: Yes, exactly, probably a better word. Saying it is doing what it is expected to do or doing more than it is expected to do, because the larger picture is that we have a rather large policy failure on our hands regarding meeting climate change targets for 2010 and beyond. There is also quite good literature on the social cost of carbon suggesting that there is a case for very much higher levels of pricing of carbon in the economy. If you take the Treasury orthodoxy in the Green Book, the Statement of Environmental Intent and so on, about internalising externalities, the social cost of carbon study suggests very, very much higher levels would be justified. There is a reason why we do not do that: international competitiveness and so on. Just to say it is meeting an unambitious target I do not think is an adequate reason for keeping or allowing the tax to erode in real terms.

Q106 Dr Turner: You advocate changing the Climate Change Levy into a carbon tax, which is very close to my heart, and of course the Climate Change Levy does not reflect the carbon intensity of the energy involved. What do you think the practical benefits would be of making that change and, just as an example, where would you place nuclear power in the context of carbon taxation?

Mr Bates: The argument for putting it on a carbon basis is that the instrument is designed to address carbon dioxide emissions. Therefore, it should be proportional to the carbon dioxide emissions from the fuel sources, which for a coal-fired power station are roughly twice the level of carbon for a combined-cycle gas-fired power station and more still for CHP and so on per units of energy produced. The Climate Change Levy in effect orchestrates an implicit cross-subsidy between gas and coal in the electricity market and the fuels market, for which there is not really an environmental justification. In the case of nuclear, the nuclear industry rightly, legitimately, claims that it is a tax that falls unfairly on them. One of the nuclear industry's advantages is that it does not really produce very much carbon for the electricity it produces. In a sense, that advantage is undervalued in the marketplace compared to gas and coal. The question with nuclear is whether or not there are other implicit subsidies to nuclear. It is all right to say, "Well, we will properly price the carbon externality", but what if there are other externalities associated with nuclear waste or accident risk and so on that are not properly priced? You would have to be sure that you are getting all of the external environmental effects properly priced before you had that sort of realignment. I think that might have been one of the justifications for doing it in the first place.

Q107 Dr Turner: We have already agreed the Climate Change Levy is simply an energy tax, but it does have some benefit in that its revenues fund bodies like the Carbon Trust and so on, and there is a case for keeping it, possibly, in order to promote energy efficiency and increase the level of energy conservation. Do you think there is, in fact, a need for both a carbon tax and the Climate Change Levy or an energy tax?

Mr Bates: I suspect you would only want to have one tax, but you could merge elements of both into a tax by how you choose to set the rates for different fuels, different energy conversion technologies. You could have an energy component that would be applied to all energy sources, a component of the tax that was designed to reflect the carbon and vary the weighting you placed on those according to your policy imperatives. I do not think there would be a need to set up a separate instrument. There is no need to do that and it would keep the cost down to keep it to one instrument; you could change the rates to encourage the behaviours you were looking for and that tax rightly funds energy efficiency and energy-reducing investments.

Q108 Dr Turner: Do you foresee ‑ I am asking you to do a bit of crystal ball gazing here, it is probably unfair ‑ any major changes to energy policy as a result of the Energy Review?

Mr Bates: If they solve the problems that they are setting out to solve, then there will have to be fairly major changes to energy policy. Really from an environmental point of view, the missing ingredient is a reliable investment grade price signal for carbon that extends out to the investment horizon of those making large carbon-relevant, carbon-intensive investment decisions whether it is building power stations, oil refineries, chemical plants or whatever. Getting that carbon price signal with sufficient credibility that project finances will use it in their project appraisals is quite a challenge. It means that the Government essentially has to create obligations or instruments that extend well beyond the life of one Parliament and, therefore, it is quite a policy challenge to do that. I think it will ultimately involve a need for a lot of political consensus around what that instrument should do and how it should function. They will have to crack that nut if they are to get a long-term trajectory into low-carbon technologies.

Q109 Dr Turner: You think if the market is given sufficiently strong and clear signals extending sufficiently into the future this will go a long way towards dealing with the problem?

Mr Bates: Yes, that is exactly right. It has to be sufficiently strong that you can bet real banker's money on it and essentially the Government carries the future political and regulatory risk around carbon because the Government is in the best place to do that.

Q110 David Howarth: The problem just raised about what are called NIMTO, Not In My Term of Office, targets is quite interesting, but can I just bring you briefly back to the point about inflation-proofing the Climate Change Levy and the separate point of changing to a carbon basis. Are there any quantitative estimates of what would happen in terms of carbon emitted, say, if there was simply a return to the revalorisation of the rate?

Mr Bates: There are, I am afraid.

Q111 David Howarth: If you could write to us, that would be helpful.

Mr Bates: There are research studies that look at price elasticities or cross-elasticities that would shine some light on that which we can dig out for you.

Q112 David Howarth: Your belief is it is worth it?

Mr Bates: Yes. People, things respond to prices, it should not be a surprise.

Q113 Colin Challen: Do you think carbon taxes would be more saleable to the public if proceeds were hypothecated to alleviating climate change, and if that were the case, in your opinion, on what basis do you think the public understands sufficiently well climate change to accept this extra burden?

Mr Bates: There is an economic orthodoxy argument against hypothecation which is that your spending priorities should be determined independently of your tax base, and logically that is probably true. However, the idea that you are imposing a tax and striking a bargain with the public, people at large, that there is a "You do your bit, we will do our bit and together we will crack the problem. We are not just fleecing you and walking off with the money, we are attempting to tackle this problem on several levels" makes that a much more acceptable proposition and a much more mature proposition in some ways. I think it is consistent with the thinking in the Sustainable Development Strategy, the excellent chapter there on behaviour change in which the strategy sets out an approach to encouraging, enabling, engaging and exemplifying interventions from the Government with a view to trying to catalyse changes in behaviour of people around their energy and resource use. Having something that engages people in the problem and encourages them to change by sending a price signal but maybe investing in energy efficiency programmes to enable them to change, that sort of rounded package feels like a much better way of dealing with people as they really are, human beings as they really are, rather than as pure economic actors responding purely to prices.

Q114 Mr Stuart: Can I take you back to the question of subsidies. You suggest that there should be a review to identify and phase out residual subsidies to environmentally damaging activities. What are the key areas where there are these kinds of subsidies?

Mr Bates: There are a number. Probably the most obvious would be the CAP. Defra and the Treasury have put forward an excellent vision of where they would like farming and agricultural support to go. In that vision they foresee subsidies to the rural economy moving from subsidising farming or, as they do now, land to subsidising environmental social public goods. That would be a key area. There is a decision to make on that fairly soon. The EU budget settlement in December opened up the prospect of a much higher level of modulation which is essentially carving out part of the Pillar 1 budget and being able to spend it on Pillar 2 activities, things like the environmental public goods. There is a choice for the UK as to how far we go into that. We would like to see that approach used quite aggressively to make sure that we retain the agri-environmental schemes and the environmental expenditures that are funded through Pillar 2 of the CAP which has been reduced in the budget settlement. That is one area. Other areas in the energy sector are there is a subsidy system for renewables which we broadly support but we have to be careful that we are distinguishing between different environmental impacts of different renewables. It becomes more pressing particularly when you get on to biofuels and some of the crop-based fuels or waste-based fuels that you are not inadvertently subsidising something that has other environmental externalities or you are valuing those appropriately or rewarding them properly. Again, in the energy sector you might want to look at the interface between the public and private sectors in terms of the disposition of risk borne by the nuclear industry. Is that risk priced properly? What is that subsidy? Is that too much or is it right for the public sector to bear those risks and liabilities? In water there is an implicit cross-subsidy between those who have water meters and those who are unmetered but make profligate use of water. What about those sorts of subsidies? There is something we could do there. I could go on about this. There are things like are we properly pricing the use of free assets like landing slots at airports and road space and so on which, again, is a form of subsidy when you get to use a publicly provided or scarce resource for free, is that right and do you end up over-using that resource or under-paying for it? It is quite a subtle debate. Interestingly, I think a lot of this will get washed out in the Comprehensive Spending Review, so it may be that a review of those sorts of subsidies will be subsumed into the Comprehensive Spending Review, which would be good.

Q115 Mr Stuart: The Pre-Budget Report says that the Government will carry out more research on Carbon Capture and Storage. What is the Environment Agency's position on CCS, especially the Storage aspect, as a means of heading off climate change?

Mr Bates: The Agency's position on this is that it is a potentially important technology when you consider the amount of fossil fuel burn that there is likely to be over the coming century. We cannot afford to leave any potential mitigation technology on the shelf. On the other hand, it is yet to be really proven in technical engineering terms and in economic terms. It poses potential safety risks, regulatory challenges and so on. We are broadly supportive of the approach the Government is taking which is to investigate, to spend money on understanding the technology. There is an excellent report that has just been done by the Intergovernmental Panel on Climate Change which reviews the science and the literature around Carbon Capture and Storage. I would say the tone in that is cautiously optimistic and cautiously optimistic is where the Environment Agency is. There are big decisions in the area of Carbon Capture and Storage because it affects the design of coal-fired power stations. With new coal-fired power stations we can make the decision as to whether those are Carbon Capture and Storage ready, for instance, by insisting on integrated gasification combined cycle to take the carbon out at the gasification stage rather than from the flue gases that is technically and economically far superior. If we wanted to have a forward looking approach to the new build for coal-fired power stations and wanted to anticipate and intercept a later development of Carbon Capture and Storage we might be building in requirements for integrated gasification type coal-fired power stations now. The Environment Agency is conducting internal research to inform the decision about what stance it would take on licensing new coal-fired power stations and that research should complete in May.

Chairman: Thank you. I want to try and deal with water, waste and transport and if we could do it in about ten minutes that would be quite helpful to the next witness.

Q116 Mr Vaizey: How serious is the water shortage in the South East? Does the Government understand it? Can it introduce any taxes to try and help?

Mr Bates: The water shortage in the South East is serious. It is very, very challenging. We have got several effects superimposed on each other: climate change, change in patterns of precipitation, growth in housing, and I guess just generally higher consumption of water. It is challenging. The infrastructure is long lasting and it is geared up to different circumstances from those we now find ourselves in. Because the infrastructure itself is large scale it is difficult to make overnight changes to it, building reservoirs is a long business. In terms of would taxes help, there is probably a prior stage to that which is getting to a much greater coverage of metering.

Q117 Mr Vaizey: I thought you might say that.

Mr Bates: You cannot really impose taxes until you can measure the quantities that are consumed. Once you have metering you are in a position to be more imaginative about tariffs. One of the concerns about water metering is you have a low income family with three kids or something with very different legitimate waters than a single couple who just want to water the garden. You could design a tariff that gave lower cost for the first few cubic metres per head and then was staged upwards. I think water metering, possibly use of obligations. We have seen quite successful initiatives in the electricity industry in which the Energy Efficiency Commitment is an obligation placed on suppliers to reduce energy consumed in the premises that they serve. That kind of concept could be rolled over to the water industry to create a stronger obligation around water efficiency and give them an obligation to start saving water but make them a bit more aggressive about water saving than they have been so far.

Q118 Mr Vaizey: Is that not Ofwat's job at the moment?

Mr Bates: Yes, but it is for us to have an opinion on it.

Q119 Mr Vaizey: Is Ofwat not doing its job? Go on!

Mr Bates: I am not going to go there. Actually, to be fair, I do not know how much Ofwat have looked into this, I do not know enough about their processes behind this. From our point of view we can see a strong case for being more aggressive with obligations, with metering, just getting a grip on this, but at the same time squaring off the social objectives. We do not want people being unable to take baths but if they want to water a big garden then maybe they should pay a bit more.

Q120 Mr Vaizey: We have got the Energy Saving Strategy, should that now cover water as well? Is there not enough emphasis on people saving water?

Mr Bates: I do not think I would want to make a specific recommendation about that without thinking a bit more about it, to be honest. It does make sense by analogy to have some sort of approach to water efficiency. It may be that doing it through water suppliers, the water companies, and placing obligations on them is sufficient and we do not need to establish a new body to do it. I would have to think about that a bit more, I am afraid.

Q121 Colin Challen: When Yorkshire Water had to deal with the drought which got it rather a lot of bad publicity several years ago they developed their grid. Has any thought been given nationally to a water grid since many parts of the country always seem to have plenty of water whereas others always seem to be short?

Mr Bates: It does come up but moving water around the country in large quantities is very expensive from an engineering and energy point of view, so the approach we have tended to adopt is to favour ahead of that a much more robust approach to water efficiency and dealing with leaks, getting the best out of the assets that we already have. We have not taken a view in favour of that but I guess in the end if it was the cost-effective way to secure water supplies compared to all other approaches, including expanding capacity and so on, then we would look at it. We are a way off the efficiency frontier in the use of water resources at the moment and it is perhaps not something we would want to move to straight away.

Q122 Joan Walley: The Environment Agency is advocating a pretty aggressive approach towards water shortage but what about water pollution? I think that the Environment Agency previously to this Committee has said you would really like to deal with diffuse water pollution and so on and so forth. What changes have you seen? Is it fair to say that nothing has happened?

Mr Bates: No. Some of the water companies have been quite imaginative in the area of diffuse pollution. In a sense, they have obligations to provide high quality drinking water and clean beaches and so on. They have to make environmental expenditures to ensure that water is of suitable quality and if it is full of nutrients, pesticides and so on they have to spend more at the water purification plants, so they are starting to think about whether they can address the sources further upstream. There are also directives around things like nitrates, phosphates, eutrophification and so on, so there is a regulatory framework that is already in place and has already delivered quite a lot. However, if there has been a shift in the challenge for water it is a shift from point source pollution to diffuse pollution from many sources who do not have the technical capacity or the internal capacity because they are a farm, say, to deal with a heavy duty regulatory regime. We are going to be taking that on under the auspices of the Water Framework Directive which is an attempt to reach high ecological standards for river basins and that does involve intervening in particular farms and dealing with many diffuse pollution sources. The work around that is now building up to full tilt and we will start to see the measures unfolding from 2007-15.

Q123 Joan Walley: There are two aspects to this, are there not: (1) the taxes and the sorts of instruments that can be used, and (2) the voluntary agreement that we had with pesticides, which is now coming to the end of its original life, and what should carry on from that. What is the Environment Agency saying, if you are really going to deal aggressively with the diffuse water pollution that there is and which we have seen in the aftermath of the oil incident that we had? There are issues like that which need to be taken into account as well.

Mr Bates: In terms of input taxes - taxes on fertilisers and pesticides - we are, in principle, in favour of those things. At the moment we are not pressing for a pesticides tax because the voluntary agreement, driven by the prospect of a tax, seems to be working quite well.

Q124 Joan Walley: Quite well or as well as it could be?

Mr Bates: All of these things are difficult to deal with. Just putting a tax on pesticides would not necessarily give us a big overnight result either. The fact is the various participants in the voluntary agreement are working well. They claim that they have put about £45 million into the system between them, which is quite a lot of money, and there is a willingness to address the problem. It may be that we are gathering low-hanging fruit and that the initial improvements that we have seen, which is a 19 per cent reduction in pesticide concentrations in the river network, is a one-off gain arising from greater awareness and the programme impetuous but, if that persists, that could be called a success anyway. The question is whether, as we go forward, we need to bring in stronger measures - taxation, regulatory interventions. We need to start identifying particular problem farms - farms that are compliant with the law but may just be unfortunately positioned so that the run-off from them is particularly problematic and expensive - and deal with them.

Q125 Joan Walley: Exactly what are you saying should be included in the policy packages that you say should be included to address the diffuse pollution that there is?

Mr Bates: For things like fertilisers there is a good case to put a small levy on the inputs and to use that to fund a programme that would help farmers convert to using lower input styles of farming, in essence. You could build programme around that, which would raise awareness and provide technical information about how to go about it, but the funds for doing all that on a "polluter pays" principle should come from a tax on the inputs. It is the logical approach to that.

Q126 Joan Walley: Would you say the same should apply to oil, solvents and other chemicals?

Mr Bates: There is a good argument for that as well. There is a regulatory approach to be had there as well. I think you want a judicious mix of instruments that reflects the reality of the organisations and the individuals that you are trying to intervene in, recognising that a small tax will probably raise some money and have an income effect but it probably will not effect a huge behavioural change unless it is backed up by a package of measures that is designed to increase the response to the price signal. Those measures need to be tailored to the types of organisation and the diffuse sources that you are trying to tackle.

Q127 Mr Vaizey: How do the Treasury, for example, use economic instruments to try and reduce the creation of waste products and recycle them? A plastic bag tax?

Mr Bates: Yes. There is quite a good experience with the plastic bag tax in Ireland, I think.

Q128 Mr Vaizey: Have you got any statistics?

Mr Bates: Yes, but not to hand. At the moment the landfill tax encourages movement of waste up the hierarchy. There is a danger it will move up the hierarchy and stop at waste incineration, and we would like to see more change going on at the top, or, if you are following the money, more of the money, more of the resources, being dealt with in the top parts of the waste hierarchy. You could have a waste tax with different rates for land-filling and different rates for incineration, for instance, a bit like the structure of a potential carbon tax. You could have something that is essentially tax waste per se but providing a greater tax.

Q129 Mr Vaizey: How do we stop people creating the products that become waste?

Mr Bates: The interesting thing is that the more you increase the costs at the bottom of the hierarchy - for instance, moving from landfill to incineration has increased the costs of disposal of waste - the more that sends a price signal up into the recycling tier that says that what was once not cost-effective to recycle now may be. If you think about how price signals are reflected up that waste hierarchy, even those measures can be quite effective, but there might be other things that you could do, for instance. There are some types of energy recovery from waste that qualify for renewables obligations - not all but some. Maybe it is possible to start to reflect embodied energy in products that are recycled and for them to get some sort of credit for that. Rather than the energy being taken out, sent through the power grid and then put back into melting glass, and so on, if you got the glass already melted you could get a credit for that. Conceptually that is something that could be done. I do not think we have developed a package of instruments that would do that sort of thing, but those are the areas to look at. The aggregates levy, for instance, has had quite a positive effect in changing behaviour up the waste hierarchy and causes more builders to recycle building rubble rather than to dump it because it is more expensive. There are some good things going on, but, again, it is one of those things where you could do more if you really wanted to press the case.

Q130 Chairman: Just to finish up on transport briefly, now we have got a renewable transport fuel obligation do you have concerns about the increased use of biofuels and, if so, what should be done about it?

Mr Bates: Not all biofuels are alike. They differ greatly in the value they offer from a carbon reduction point of view. The public policy purpose for having the renewable transport fuels obligation is part of the climate change programme, but the amount of carbon reduction that you get from a given litre of biofuels can vary quite considerably. We need to make sure that we are being realistic about valuing biofuels in terms of their environmental value. Then we need to be clear about the negative environmental effects that arise from biofuels to do with intensive agriculture, crop impacts, deforestation in Brazil, or whatever. We need to go into that subject with eyes wide open. The Environment Agency has developed a tool to try to give an assessment of the various environmental dimensions of different sources of bio-energy, called the "beet tool", and that is something that we would like to see taken forward and used in thinking about how to design the economic instruments that are supporting the development of bio-energy.

Q131 Colin Challen: Would you favour the introduction of a certification scheme for biofuels in the same way that we have the FSC scheme for timber?

Mr Bates: In terms of principle, you have to know, with confidence, what these fuels are, what value they offer and what impacts they bring, and that does lead you inevitably to having some sort of accreditation or certification scheme. Otherwise, if you want to adjust the economic instruments to reflect those environmental characteristics, you have got no currency to go on. That sort of certification scheme would give you some insight into what should qualify for what kind of support under, say, a renewable transport fuels obligation. Without that you cannot differentiate between them.

Q132 Mr Chaytor: Do you think it is more difficult to deal with the issue of the cost of the use of private vehicles since the recent rise in oil prices, or has it concentrated people's minds more on the urgency of the situation?

Mr Bates: Whether we get a high cost of fuel through shortages and cartel behaviour or we get it through tax, you could say that from an environmental point of view it does not make much difference. I think there is an argument that goes a little beyond that though, which is that when you have a policy instrument like the fuel tax escalator or, like regular increases in fuel duty, it sends a much longer-term signal about the intent that feeds back up into the cars that manufacturers design about R&D programmes, the cars that people buy and it sends a signal from government about what they think about the future evolution of the vehicle and transport market. There is a danger that if we just say, "Oil prices are doing the heavy lifting for us", we will lose that kind of signal. Therefore, whilst I think the Chancellor has a point in saying that there have been very steep rises in oil prices and we do not want to clobber the motorist relentlessly, we also need to ensure that there is a strong signal about the direction of travel and how we see transport fitting into a concerted national effort around meeting the climate change targets, which at the moment it most certainly is not. I think that is the key challenge - a sense of direction about where we are going.

Q133 Mr Chaytor: The Agency's focus has been on the revenue costs of private car use. You do not seem to have said much about the capital cost?

Mr Bates: Sorry; no. There are lots of things to unpack there. Stop me if I am not getting to your question, but we want to look at the environmental impacts of vehicles in the round. For instance, the recyclability of the material, the consumption of materials, of embodied energy, and so on, we want the environmental costs of those reflected in the prices that were charged. We support the use of a vehicle excise duty as a policy instrument, as a way of affecting the choices that motorists make, and we think that you could have steeper gradients in vehicle excise duty. You could even go to much steeper gradients if you are prepared to move to a fee-based system in which you would have gas guzzlers paying those that were purchasing small cars and a transfer between different types of motorists. There is a lot of potential for those sorts of policy instruments that we will exploit perhaps in the future.

Q134 Mr Chaytor: But as long as the impact of globalisation is bringing down the purchase price of motor cars dramatically and the impact of the single market is doing that, all of these things are just drops in the ocean, are they not? As long as it is cheap to buy a car, whether or not the VED goes up a little bit or not is really neither here nor there.

Mr Bates: If a vehicle excise duty is high enough, in a sense it could compensate for falls in the purchase price of vehicles. We can also apply tougher regulatory standards to vehicles so that they have strong fuel efficiency standards or other environmental criteria applied to them, such as recyclability and the type of materials that they use. Those things would tend to internalise external costs and bid up the price of motoring, but behind your point is an observation that the cost of motoring is steadily falling despite all these interventions. Overall the cost per mile is falling, and that is a source of concern. At the same time, incomes are rising, there is a high propensity to travel given the economic framework that we have for charging out for road use, which is not to charge for it for the most part. I think, and the Agency thinks, that there is a lot of scope for pushing much harder and getting something that puts transport on to a more sustainable footing, and those types of economic instruments are the tools that are available to do it, including a proper pricing infrastructure.

Q135 Chairman: On VED specifically, given that people are prepared to spend £40,000 or more for a car, you have to have quite a hefty increase in VED to make any impact at all. Would you envisage VED at £5,000 for cars of that sort, perhaps £10,000?

Mr Bates: I do not think we have a position that would go that far, to be honest. I do not know. I think with instruments like this there is an argument for saying that you should consider quite large increases rather than a sort of stealthy, small salami-slicing increase partly to get the big introduction effect and for it to really send a sharp signal. I think tackling gas guzzlers with VED would be a sensible approach. Whether £5,000 a year is overkill or sufficient, I just do not know.

Q136 Dr Turner: Assuming biofuels to be produced in an environmentally acceptable manner, how would you envisage treating vehicles running on a high percentage of biofuels both in terms of the fuel tax and the vehicle excise duty?

Mr Bates: We have seen that differential rates in fuel tax can be an affect the policy lever, and there will be every reason to use that lever, as was done with unleaded fuel, so that would be an option. If it was about a change in engine design to allow a vehicle to run on a much higher proportion of biofuels, the question is, would the concession that you got through the lower rate of fuel tax be sufficient to incentivise people to buy cars that could use that? You may then say you could have a different tariff for vehicle excise duty that reflected the different capability of the car, in the same way that you reflect the fuel-efficiency of the car. In other words, maybe you could calculate fuel-efficiency on the basis of its fossil-fuel efficiency; exclude maybe renewables components as tax exempt in some way.

Q137 Dr Turner: Would you favour that?

Mr Bates: No, I think it is too soon for me to commit to an instrument design. I will express the thought processes rather than offer you a conclusion, if you do not mind.

Q138 Chairman: Thank you very much. We have a covered a little bit of ground and we are grateful for you coming in. I think that draws our question to a close.

Mr Bates: Thank you.


Memorandum submitted by Professor Paul Ekins

 

Examination of Witness

 

Witness: Professor Paul Ekins, Head of Environment Group, Policy Studies Institute, gave evidence.

Q139 Chairman: Professor Ekins, welcome. I know you are more familiar with this Committee than I am.

Professor Ekins: Thank you, Chairman.

Q140 Chairman: Other members will know you well. Thank you for coming. I am sorry we are running slightly late. You will have heard the previous discussions. To kick off, the latest Pre-Budget Report, the first one in this Department, what is your overall assessment of it in terms of the way it is addressing the environmental challenges?

Professor Ekins: I think it was very much more of the same from the previous Pre-Budget Report, and I think that was disappointing, in view of the previous two new Labour governments in 1997. Very quickly they produced a very short document called the Statement of Intent on environmental taxation which then proceeded to do quite a bit of work, and we had very significant initiatives on environmental taxation over the subsequent years. In 2002 we had a much longer document on environmental taxation, which essentially restated some of the objectives with an awful lot of, in my view, rather irrelevant padding, and that document did much less work over the subsequent years in terms of significant new initiatives. Now, it seems, we have no new statement at all, but we do have a PBR with practically nothing environmentally significant in the environmental chapter. The real environmental impacts are elsewhere, as in the new house-building programme, which is mentioned at some length in the productivity chapter. I think that says quite a lot about how environmental impacts are being perceived.

Q141 Chairman: Do you think the Treasury is losing interest in this? Is it cooling off, or is there a lot going on behind the scenes which we are not yet able to detect?

Professor Ekins: I am not an insider. Obviously I try to keep my ear close to the ground, and I do not hear anything. That is not to say that it is not happening in some recess that is very far from the ground that I am listening at but, if it is, it is very well hidden.

Q142 Joan Walley: If you were, in this third term, Special Adviser to the Treasury and dreaming the possible, or dreaming the impossible, what would you say should be included in terms of the tax proposals coming from the Treasury?

Professor Ekins: I think we do need a restatement of the principle, because the problem with the document in 2002 was that it was very long - it was rather like a text-book in terms of setting out all kinds of optimal arrangements that have very little real purchase on the political process, whereas I think the Statement of Intent essentially said that we need a tax system which focuses more on bad activities environmentally rather than on good activities in terms of productive activity, labour taxes, capital taxes and we will achieve a shift between those. That was the central message of the Statement of Intent. It is still, in my mind, both a very reasonable and desirable statement and I think we need to get back to it. If one looks and sees what has happened since 2000, it is quite clear that we have achieved a tax shift in the reverse direction to that which was set out in 2002, and so we need to look again at the big earning taxes, mainly taxes on energy, and work out how we can again start to derive significant revenues from them, which then, of course, will allow other taxes to be reduced elsewhere.

Q143 Joan Walley: We heard a little bit earlier on about NIMTO ("not in my term of office"). Do you think the Treasury is becoming too politically scared? Is it too dangerous an issue to tackle? It has got to be tackled, so how do you feel the Treasury could be winning the public round to gain support for the long-term changes that are needed?

Professor Ekins: I think the big political point, which I do not think anyone has yet managed to put across, is the reality of the tax shift as opposed to the tax increase. If one was able to put across the fact that one is talking about deriving more of necessary taxation from activities which we wish to discourage and allowing people to have more money in their pocket because of reductions in, for example, employees National Insurance contributions, that seems to me to be politically quite a saleable message were it to be put across in a credible way. The problem with this whole issue is that Chancellors in the past have found it very difficult to command credibility with the notion of a tax shift, because everyone imagines that what they mean is a tax increase and they are simply engaging in some form of spin, which the public does not really buy. I think there is a serious problem but, if it were possible to get cross that essential message, I think it could be politically extremely attractive.

Q144 Joan Walley: If we are trying to get that message across, how much do you think an all-party consensus is important for that? How much do you think transparency is important as well so that we are not giving out mixed messages?

Professor Ekins: As politicians you know better than I how difficult it would be to get total consensus on tax matters, which inevitably have to be a major part of the political battleground on which politics engages, but I do think that there are a number of principles that could be enunciated. The first is quite simply the "polluter pays" principle. This is the oldest principle of environmental policy; it is also largely ignored. A robust restatement of the "polluter pays" principle from all parties might lead to a level of consensus around that which would at least make it more difficult to move away from taxing polluting activities towards subsidising their cleaning up, which is still very much the way political debate seems to go. The second issue where I think potentially there could be consensus is, again, this issue of a tax shift. The long-term desirability of increasing the proportion of taxation that comes from activities that we would like to discourage. We know from such taxes that they can be a very stable tax base, even if they do discourage activities that cause them, and it is certainly going to be a very long time before fossil fuels cease to provide a very substantial tax base. Although there are issues of fiscal stability, they are by no means as important as they are sometimes made out to be. If we were able to get political agreement on those two core principles, I think it would be possible to fashion something of this long-term direction in terms of pricing signals which your previous witness was talking a bit about, and engender a sense among people that, yes, we know where things are going and we know that from this tax shift we are going to have more money in our pockets, but we also know that if we choose to spend that money on environmentally damaging activities, we are going to be able to buy fewer of them. If we choose to spend it on things that are not environmentally damaging, then clearly we are going to be better off unequivocally.

Q145 Joan Walley: If we could get some sign-up from the Treasury as to those two principles, do you think that, in addition, there would be a need to have some kind of institutional change? I know that you are familiar with previous reports of this Committee when we have recommended in the past a Green Tax Commission. Do you think we would need a new institution - it could be that or it could be an energy agency of some kind or another - whereby we could get a buy into this long-term changes that would then help to get across to the public the importance of changing direction and using tax in this way for the environmental agenda?

Professor Ekins: I think the main importance of a body like a Green Tax Commission is to do with credibility. It is to enable this debate to take place at a pretty high level without people being very suspicious about the motives of the key players who were organising it. I am afraid, if the Treasury were to be organising it, we would start from a very significant disadvantage in that respect. If it were possible, through this wide-ranging debate, to arrive at the kind of political buy-in that I am talking about, then it seems to me that it would be desirable for taxes to be more generally discussable across government. I do hear, for example, that departments like Defra, which clearly have an interest in environmental taxes of all kinds, find it very difficult actually to have sensible conversations, both among themselves and with outsiders, about environmental taxes because the Treasury, of course, considers that that is their preserve and no-one else may touch it. It will be highly desirable for all the departments that have significant environmental impacts, and that is most departments, to be able to talk about these things in a joint form, in a way that recognises that this needed to be something that was joined up right across government. Perhaps that would be an institutional innovation, but probably the incipient institutions already exist through bodies such as Green Ministers, or whatever. I think it does require a new paradigm to be set, but thereafter it seems to me that many of the institutions that we have can serve us pretty well.

Chairman: Maybe the time to tackle the malign, excessive part of the Treasury is when the Chancellor becomes Prime Minister!

Q146 David Howarth: Can I ask your view on another possible barrier to the tax shift that we are talking about, which is the Danish work showing that environmental taxes tend to be regressive except for fuel taxes on transport which are proportionate but are not regressive, and so you would have to make the tax shift disproportionate into the lower end of the income scale to make up for that. Do you agree that that is a characteristic of environmental taxation, and therefore do you agree that the political consensus would have to be around the distributional issues not just about technical issues?

Professor Ekins: The distributional issues are very important. I spent a certain amount of time academically looking at those and produced a number of papers on a project founded by the Joseph Rowntree Foundation. We looked in very great detail at the distributional implications of both household use of energy, water, waste generation and transport. In all of them, except for the household use of energy, it was clearly possible to introduce charging schemes - let us call them charging schemes rather than taxes for the moment - which at worst were not regressive and at best could be highly progressive depending on the political orientation. That certainly convinced me, for example, that a lot of the debate about water metering that took place at the end of the 1990s, to some extent at least founded on this issue of regressivity, was in fact misplaced and that it would be perfectly possible to introduce water metering in such a way that it was not regressive. Partly, that is because we have a water-charging system at the moment which is pretty regressive and, therefore, there is quite a lot of scope to get less regressive as you introduce different kinds of charging systems. Energy is different, because even in the lowest income decile there is an enormous variation of energy use. We identify the difference as a factor of six between technically the twentieth percentile and the eightieth percentile, which I know you will understand, probably with all your other colleagues as well. Broadly, it means that there is at least a factor of six difference even among the lowest income households, which means that it is practically impossible to compensate for any kind of carbon tax through the benefit system, or whatever, which led us to recommend that you needed a different approach. Part of the reason, at least, for this is the very low energy efficiency of the housing stock, which I know this Committee in the past has spent quite a lot of time looking at. That is gradually being improved, but, in my view, it is too gradual and it needs to be hastened. That could be done through a mechanism such as we are advocating in a report that was published today by the Green Alliance through council tax advantages if people insulate their homes. We were advocating a range of doing things. I think the distributional issue is terribly important, I do not think it is a show stopper and I think it can be effectively addressed.

Q147 Mark Pritchard: I was aware of that report, and congratulations on the timing of that report.

Professor Ekins: It is a pure coincidence, a pure fluke.

Q148 Mark Pritchard: I think the figure mentioned was five per cent - I do not know if it is correct - a five per cent rebate on council tax for energy-efficient homes. Would you regard that as a progressive tax and would you regard as a regressive tax a certain political party's commitment to put seven per cent on all new-home build?

Professor Ekins: I think those are two different issues. Council tax, as it stands, is slightly regressive, in the sense that the council tax banding does not reflect equal proportions of incomes, so that people in the lower band of council taxes tend to pay a higher proportion of their income in tax than people in the higher bands of council tax. Therefore, if you have an across the board reduction in council tax, and I think we were advocating something like a one off reduction of £100 for someone who took up a package of energy efficiency measures, that in itself would be progressive because, in the case of a low income person who took it up, £100 pounds means more to them, relatively speaking, than a high income person. That was one of the reasons why we felt able to advocate that, because we were committed not to make regressive recommendations. I think VAT on new-build is a very interesting and difficult issue. The issue that we were particularly concerned about in the report is that, of course, refurbishment has a 17.5 per cent VAT rate on it. With another hat on, I sit on the Royal Commission on Environmental Pollution and we are doing a study into the urban environment at the moment, and several of the developers have submitted evidence to us to the effect that that 17.5 per cent difference means that, even when refurbishment is cheaper but is not 17.5 per cent cheaper, they knock down perfectly good buildings in order to build sometimes inferior buildings in structural terms purely because of the fiscal system. That does not seem to us to make a great deal of sense. If one was to achieve a rebalancing between VAT such that new homes did carry something like eight per cent and then if you built to the new sustainable code for buildings higher standards, perhaps that could go down to the minimum of five per cent, and you reduced to eight per cent significant refurbishment, VAT again falling to five per cent if it was refurbished to the new sustainable code, that seemed to us, when we were writing this report - the Royal Commission is still considering what conclusions it wants to come to on this - to be a more sensible VAT structure for buildings. In so far as probably first-time buyers are more likely to buy refurbished than new homes, it might be better if those were at the cheaper end of the market.

Q149 Mr Stuart: I think we are all aware that environmental taxes are now at their lowest levels since at least 1990 - around 8.3 per cent - largely because of the failure to raise fuel duties since the year 2000. I know this is an issue that this Committee has covered with you before, but the ONS also published figures for public sector expenditure on environmental protection, and I was surprised to see that so little, in relative terms, was being spent on what is classed as "ambient air and climate". Do you think that the level of government expenditure in such areas is a valid measure of its commitment to environmental tax and spending strategy?

Professor Ekins: I do not really, because, especially in the climate area, many of the policy instruments have been very carefully designed so that they do not represent public expenditure. Whether we are talking about the renewables obligation or the energy efficiency commitment, these are obligations, as I know you know, put on energy suppliers and any costs that may accrue go directly to energy consumers without going through public expenditure at all, and yet it is conceivable that these policy measures may represent very significant expenditures and commitments to climate policy. Another obvious one is the fulfilment of the Waste Water Directive. We have private water companies. It is largely private water companies who do make the investments for waste water, so when I look at the waste water management figure, which also is relatively low, I know that the very large investments that the private water companies have made are not in there. What I think is remarkable is the very large proportion in those figures of waste management expenditures, which shows the extent to which we still have not yet managed to connect the public expenditures on waste collection to the people who are actually producing the waste. Another of the recommendations that we made in our report today was that local councils should be allowed to institute variable waste charging. Not a new proposition, this was proposed by the Strategy Unit back in 2002, and I am extremely surprised that the Government has not yet moved on it because, had it done so back in 2002, we would have some valuable experience from probably only a few councils. No-one imagines that councils are going to stampede into this field, because it is potentially political quite difficult, like lots of these areas, but a few would have experimented with it, given the kind of incentives that there are in this field, and we would have some experience as to how this could best be organised without encouraging fly-tipping, et cetera, all the other kinds of issues around waste management. I feel we still have quite a long way to go in many of these measures.

Q150 Mr Stuart: Are you saying that you think the £250 million, or whatever it is, on protection of ambient air and climate, is adequate because there is spending elsewhere but that we are not seeing in these figures or not?

Professor Ekins: I am quite certain that our climate change programme is not currently adequate either to meet the Government's own targets for 2010 or what we need to do in order to stabilise climate. Whether it is most sensible to address that through more public expenditure or whether one would be better to design other instruments, such as price incentives, for example - if you put up the price of something you may even gain revenue from doing that while achieving a reduction in carbon emissions - I think is highly doubtful, and I therefore would not focus on public expenditure figures as a definitive signal of Government commitment.

Q151 Mr Stuart: More broadly, do you think best use is being made of the ONS's environmental accounts?

Professor Ekins: No, I do not. I was extremely pleased when those environmental accounts were developed. I thought that was an enormous advance in terms of allowing government to have a much broader and more realistic view of what economic activity was all about. To be fair, I think there are only just ticking over at the moment. They are not terribly well resourced and they are not terribly well used. I think they could be far more used to inform target setting, to inform benchmarking of various environmental performance measures across sectors, to identify priority sectors and priority actions where particular hotspots of pollution were occurring and, again, something that this Committee has returned to in the past, to generally move towards an attribution of importance to the concept of resource productivity. How much wealth are we generating from the resource base that we are using that is comparable to the attention that is given to labour productivity by economists and the Treasury and other arms of government? In my view, when we seriously adopt a desire to do that we will find that the environmental accounts are much more useful than we have currently managed to make them. We will have to develop the environmental accounts in various ways to be able to come up with the kind of sophisticated measures that we will then want, but I think there is an enormous amount of potential development in that direction that could be achieved.

Q152 Mr Stuart: Could you explain a little more about how you think they could be developed?

Professor Ekins: It is to do really with getting greater clarity about the movements of energy and material through the industrial sectors and attaching to those movements of energy and material the environmental impacts that they cause. We do that a bit for some things, but we have no idea, for example, which are the sectors, in quantitative terms, that most pollute water courses. We have a vague idea, obviously, that agriculture has quite a lot of diffuse pollution, but the water pollution accounts are extremely ill-developed and they could be much better developed. We are quite good at air pollution, but I think there can be greater geographic break down of that as well as by the industrial sector, and, as we know, air pollution is still a problem in some parts of the country, in some parts of the country it is getting worse, and so we need to be aware of where that is coming from and how that can most easily be abated. I think there are a number of areas. If I were to focus on this for a week or so, I would be able to come up with a much more convincing list, but one only tends to focus on things that you feel have a realistic chance of being implemented. Unfortunately, that does not seem to be high on the ONS's agenda at the moment.

Q153 Chairman: Coming on to the Stern Review, what do you hope might be achieved by this?

Professor Ekins: I am quite certain that they will not discover anything new, because there is an enormous literature out there, there are very large numbers of scientists, and I very much hope they would not want to second-guess the Inter-governmental Panel on Climate Change or any of those sorts of things. Whether it achieves anything useful from my point of view depends on the strength with which it identifies the problem (and I think the paper they have recently put on their website is a fairly good start in that respect), the urgency with which they recommend a solution and then, obviously, the detail of the recommendations which they make as to how these solutions can be pursued. The devil is almost certainly going to be in that detail. We know that it is not easy to reduce carbon emissions. The Climate Change Programme Review, when it comes out, is certain to make that fact apparent. The fact that it is taking so long for it to come out illustrates the difficulty of getting departmental agreement across the kinds of measures that are likely to be necessary. One hopes that, by coming from Treasury, it will be perceived as an authoritative document that perhaps the potential next Prime Minister is prepared to act on, and if it says things sufficiently strongly, sufficiently cogently and makes recommendations that the Chancellor, in particular, is prepared to buy into, then I think it could deliver a significant impetuous to this whole debate.

Q154 Chairman: Are there any downsides? Is there a danger it might not be helpful?

Professor Ekins: I imagine that if you asked Sir Nicholas as to whether he knew what he was going to say at the end when he is less than 20 per cent of the way through, he would say, "No", and, therefore, obviously it is possible that it will do the reverse of all those things, it will come up with a weaker statement of the case, and, worst of all, in my view, it may come up with the kind of statement that says, "This is a big international problem. The UK is a relatively small international player. Therefore, we cannot do much until everyone does something", which, of course, will be complete death and termination to a climate change programme generally. I think that is a significant danger, and I very much hope that the team is guarding against it because no doubt there will be some siren voices which are putting that point of view to them.

Q155 Dr Turner: Stern has not only been asked to examine the long-term economic impacts, which is challenging enough, but also to draw implications to the timescales for action and the choice of policies of institutions. What do you make of that? What practical impacts do you think the review is going to have on policies and institutions?

Professor Ekins: In terms of the tenor of my own evidence to the Stern Review, and I did submit evidence, I hope that one of the things it investigates very thoroughly is the cost of mitigation. It is my view that the cost of mitigation of carbon emissions, certainly up to the 30-50 per cent level, need not be great. This was, indeed, the conclusion of the Government's own modelling that led to the Energy White Paper, and the reason for that lies in the fundamental fact of innovation, the development of new technology and the ability of the economy to adjust and adapt over long periods to price signals and other kinds of regulation in such a way that costs are reduced, which does not mean, of course, that no-one will feel any different. Obviously certain kinds of behaviours will become very expensive and people who enjoy those behaviours will find that the world has changed for the worst around them, but in terms of macro economic impact, in terms of the ability of the country to generate viable activities that have a market in the international market place and therefore we have a high standard of living, seems to me to be a very important message which all the literature that I trust seems to be giving in terms of the economic models and all that kind of stuff, which is where I spend a fair bit of my academic time. I very much hope that the Stern Review will look into that literature in great detail and will obviously form its own view about that, because, clearly, whether or not countries do commit to a programme of serious mitigation will depend, to some extent, on what it thinks it is going to cost them, and, in my view, that is not an enormous cost, provided it is intelligently pursued. I think there is plenty of evidence for that, and that is the evidence I was particularly keen to draw to their attention.

Q156 Dr Turner: Do you think the Government has invested too much in the climate change levy and renewables obligation to have the flexibility to change its fiscal policy in order to give some fundamental changes to energy policy?

Professor Ekins: I think it is extremely important that we have some stability in energy policy. I think this especially applies to the renewables obligation, which depends for its effect on private investment. There has been some private investment in renewables. There is the potential for an enormous amount more private investment, especially in such technologies as off-shore wind, and, if that private investment were to come forward and the policy were then to change so that it was substantially less profitable than it was thought it was going to be, then the whole basis under which our new energy markets are supposed to work and are supposed to bring forward investment would be undermined. I think those who have launched the new Energy Review, of course, have been at some pains to stress that it will deliver stability in the policy instruments that have been agreed, and I very much hope that that is the case. Obviously, if it is to do something new, then it will have to identify interventions to address those areas which it feels were not well covered by the Energy White Paper, and obviously one is looking forward to seeing what those might be.

Q157 Dr Turner: Stern may very well conclude that climate change will have a very adverse effect on economic growth but that there will be a cost to addressing that change. Therefore this may make governments nervous about acting on that. What do you think? Do you think politicians will have the courage to act on such conclusions?

Professor Ekins: I think that this is an area where political consensus is absolutely critical, because I think this whole area has been dogged for much too long by a few people pointing to the half dozen climate scientists around the world who are still sceptics and saying, therefore, there is no evidence to move. The importance of a review like Stern may be to restate what is the overwhelming scientific consensus about the seriousness of climate change. If we were able to get political consensus round that, then I think politicians have the very difficult task of selling to the country short-term measures which, even if they are not macro economic costs, will be experienced as unwelcome changes of behaviour. After all, that is what most constituents are worried about, unwelcome changes of behaviour - that they cannot run around in their cars as much they might like to, that cheap flights might become less available than they currently are, all the very difficult political issues to do with carbon emissions which one is very aware of - and it will be very easy to duck those because it will be perceived that these climate impacts are well in the future and when they come it is going to be extremely difficult to say that this definitively was a result of anthropogenic climate change as opposed to being some freak storm somewhere. We saw all those arguments wheeled out with Katrina, and it was absolutely a case in point, scientists saying, "We can tell you categorically that hurricanes like that are more likely in the future, but there is no knowing whether Katrina would have happened if the carbon emissions concentration in the atmosphere had been at industrial levels or not." Those sorts of things will demand a different kind of politics that manages to persuade people that these changes in behaviour - and I would rather express it in those terms rather than costs because, indeed, there may not be costs at all - in terms of energy may save people money. We know there are lots of measures that will save people money, but they do require changes in behaviour, like inviting insulation contractors into your home when the last people you want to invite into your home are insulation contractors. One knows that these things can be difficult politically and in behaviour terms, even if they do not cost you money overall, and I think the politics of persuading people to go along with that is not going to be easy.

Q158 Dr Turner: We have got three different policy reviews going on which really all affect the same ground - the Climate Change Policy Review, the Energy Review and the Stern Review. Are you worried about possible contradictions between the outcomes of these reviews?

Professor Ekins: I hope there is sufficient joined-up government to ensure that we are not going to get contradictions. I think there would be many big own goals if there were perceived to be contradictions. One knows that the officials on these particular reviews are communicating closely with each other. The way I hope it is going to work is that the Climate Change Programme Review will have this view on 2010 and the more difficult measures that will be required to move towards the Government's target for 2010 in terms of domestic emissions, and I think it will focus to a very large extent, or will cover to a large extent the kind of demand side issues of transport and household energy efficiency. We have had the Energy Efficiency Innovation Review, which was covering a lot of that. That is obviously going to feed into the Climate Change Programme Review. I think the key issue for the Energy Review is how are we going to ensure that we get sufficient investment in new generation capacity round about 2015 onwards, and what should that generation capacity be in order to be low carbon and high security? That seems to me to be the hole in the Energy White Paper. Obviously you cannot answer that question until you have come to a view on what the demand side issues are going to be, which is why these two reviews have to be tied in. We cannot be taking decisions about generation capacity in 2015 if we have not got a view of what the demand for energy is likely to be and how that is going to develop. What we hope is that energy efficiency measures will be sufficiently effective for the demand to start falling, which will obviously then mean that you need far fewer power stations, or whatever it is you are talking about, than otherwise. The Stern Review, I hope - it will put all this into an international context obviously - will reinforce the urgency of it, will bind the Chancellor into a climate change agenda, which I think is very important. We know the current Prime Minister has bought into a climate change agenda. I think it would be important for the present Chancellor to be bound into that. My optimistic scenario is that these three will all reinforce each other and will manage to build a commitment in the country at large about the importance of taking an integrated, holistic joined-up approach to what is a pretty tough political problem.

Q159 David Howarth: Can I take you to the specific issue of the social cost of carbon, which presumably the Stern Review is going to take up and overtake the various other bits of work that are being carried out at the moment. Perhaps you could tell us about that, if your ear is closer to the ground on that particular issue, but can I ask you two questions. What is your position on the theoretical debate about whether there is any point in having an idea of the social cost of carbon on the grounds that it is incompatible with the environmental limits, and that what we should be doing is starting with environmental outcomes that we want to achieve and then look at the most cost-effective way of doing it, so that the whole of the conventional cost benefit analysis is simply inappropriate. What is your view on that? If your view is that there is a point to having an idea of the social cost of carbon, where do you think the debate has got? What appears to be going on is that the estimates seem to be diverging. The Stockholm Report said that the lower limit is £35 a ton, the upper limits is either a thousand or infinity. Is that another problem with the whole idea that it does not seem to be a very stable market. It seems to be spinning out of control?

Professor Ekins: Yes, I must declare something of an interest in that I have been peer reviewer for both the social cost of carbon papers that are part of the Defra/Treasury discussion, and so I know them quite well. The Stockholm paper, as you say, identifies that the social cost of carbon has a range of at least three orders of magnitude (i.e. between one and a thousand), but it is also characterised by the fact that even the thousand is not an upper limit, and, as you said, there is no upper limit when you are talking about the kinds of catastrophes that scientists are increasingly thinking are not likely by any means, or even probable, but have a non negligible probability, so it does not have an upper limit and it does not have a best estimate. The Stockholm Environment Institute was not able to say, "It is somewhere between one and a thousand, but, if we choose 250, we are sort of all right." In my mind, a number with those characteristics is not of a great deal of use in policy terms. The problem with the second report is that it is trying to identify a policy use for a number with those characteristics, which is why it has been very delayed. It has indulged in intellectual contortions of an extraordinary agility and, I have to say, not particular validity, in my view, and I think they will find it very difficult to publish a credible second report, which shows you what you do with a number with those characteristics. I think it relates to the environmental limits issue, because environmental limits is about saying that there are environmental impacts that are simply unacceptable and they are impacts that we do not want to put money numbers on particularly because they are very unpleasant, they do involve significant loss of life, loss of culture, loss of livelihood, impacts that are not traded in markets and many people think that even talking about them in market terms is both unethical and indefensible, and so you generate a lot of heat by trying to express them in those terms. The environmental limit is there for saying, "With that class of impacts, or potential impacts" - and clearly it is also a concept that has been invented to address uncertainties - "we just do not want to go there. We would much rather have a policy position that says we are not going to exceed those particular limits", and we are doing this the whole time with, for example, drinking water standards. We know quite well what drinking water quality ought to be in order not to have an unacceptable impact on human health, and we simply say, "Do it", and the Drinking Water Inspectorate and the water companies do it. We do not do cost-benefit analysis the whole time and value the lives lost and working hours lost and so on from that. That is a decision taken on the basis of environmental limits. I think political discourse does that, and I think the 60 per cent carbon reduction target that was the Royal Commission's recommendation in 2000 that the Government endorsed in the White Paper is very much that kind of approach. We do not want dangerous anthropogenic interference in the climate system. We are not quite sure what it would mean, but we think it might mean a very large sea level rise, it might mean very large storms arising, it might mean very big droughts in parts of the world where large numbers of people live and are already on the food margin, and we just do not want to go there. That seems to me to be a very robust base for policy. Whether 60 per cent is the right number or, as some people have said, it needs to be much closer to 80 per cent, and I think when the Royal Commission recommended it 60 per cent seemed a kind of middle estimate. The climate sciences have become rather more alarming over the last couple of years, and I think 60 per cent is now right at the bottom of a credible claim that you will not get dangerous interference with the climate, but that seems to me to be a much more robust way of addressing public policy on that issue.

Q160 David Howarth: What about the problem of policy-makers faced with choices between individual projects, none of which solve the whole problem, none of which produce the outcomes we want, but make a contribution to that outcome but have different costs? Do we not need some sort of tool for policy-makers which helps them with progress or partial solutions rather than simply saying, "What you should be doing is reaching a solution now"? Obviously that solution has been made over a lot of different projects and different policies.

Professor Ekins: Yes, but that has nothing at all to do with the social cost of carbon, and part of the problem with the second paper, the policy paper that is still under discussion, is that it conflates the social cost of carbon, which is to do with the damages caused by climate change, with what you are talking about, which is the cost of abatement. We have a much clearer idea of what the costs of abatement are across the different sectors of carbon emissions, and, indeed, it is desirable to equalise the cost of abatement across those sectors. One of the reasons I am fairly critical of biofuels, for example, certainly deriving from bio-mass in this country, is that the studies of the Royal Commission and others have shown categorically that easily the most efficient use of bio-mass in this country is for heat purposes, especially district heating schemes on a medium-sized scale, and that is where we ought to be putting that, and your cost of carbon abatement will show that very clearly. The costs of carbon abatement using bio-mass for those purposes might be £50 to £100 per ton of carbon, whereas if we are looking at biofuels, you are probably talking about £250 per ton of carbon, and that therefore, if you have a limited bio-mass resource, which we have, you are much better off putting it into the low cost of abatement use, but that has nothing at all to do with the social cost of carbon, which is to do with the damage costs of climate change, which is a completely different concept. It is because of the confusion between those two concepts in the second paper that I think it scores some spectacular intellectual own-goals.

Q161 David Howarth: The final point on this general area of cost benefit analysis that I would like you to comment on is what kind of solutions there are to the long-term discount, how to judge policies over 1500 years when the idea of discount rates do not really make sense given that and given the enormous size of the problem we are facing. What alternatives are there? What should we be looking for in terms of policy assessment tools?

Professor Ekins: I think that it becomes extremely difficult. Part of the problem, of course, with the social cost of carbon is that it is so dependent on the discount rates that you choose to calculate it, and there does not seem to be a very good reason for making any choice between one and a half per cent or ten or 15 per cent. Obviously that creates an enormous difference in the value, I think of more relevance. Discounting damage costs over those kinds of timeframes does not seem to me to be particularly meaningful, especially when we are very uncertain to begin with what they are likely to be. I think of much more interest in terms of discounting are the kinds of things that are likely to be proposed with respect to a new nuclear programme, for example. If the Energy Review were to propose a new nuclear programme, what is likely to be suggested is that, to deal with decommissioning and waste disposal, which are two thorny nuclear problems, as we know from the past, the funders of this nuclear programme should put aside sums of money, real sums of money, unlike in the past kind of notional accounting sums of money - I mean real pots of money that sit in accounts and grow - and you can calculate that if you can put relatively small sums of money in these bank accounts, and if they will grow over five to seven per cent a year, or whatever the projections are, by the time we get 50 or 100 years down the line and these power stations have done their work and they need to be commissioned and the resource needs to be stored, et cetera, you will then have a good pot of money to deal with that problem. That is fine, if it works, but, as we know, projections of five to seven per cent growth over 50 to 100 years are at best uncertain. We cannot be sure that economies will grow at historical rates. Indeed, if there is climate change which impacts very seriously on the growth of the economy in the future, we may find that asset values of all kinds fall in value and therefore this pot of money which we thought was going to grow at whatever rate it was suddenly does not grow, and so we are left at the end of 50 years with a large waste and decommissioning problem but without the sum of money that we thought we would have to deal with the problem. Interest rates and discount rates are two sides of the same coin, and when one is looking at institutions like the financial system over very long periods, I think one has to be cautious about assuming that the future is going to be like the past, and so I think discount interest rate problems over long periods do require very careful consideration.

Q162 Chairman: I am hoping we can wrap this up by 5.00 o'clock. We want to talk about emissions trading. Can I ask you briefly in passing, I understand the Swedes have announced they are now going to make Sweden oil free by 2020. If they get somewhere towards achieving that, what kind of impact will that have on the competitive positions of Sweden and Britain?

Professor Ekins: That is very interesting. In terms of oil, a very large proportion of oil is used for passenger and leisure kinds of travel which need not have any impact on anyone's competitive position at all. It will obviously have a lot of impact on the way that Swedes are able to spend their leisure time, because presumably the biofuel that they will be growing to replace the oil in their motor cars will be more expensive than oil will and so they will do less travelling of that kind. I think of all the European economies the Swedes are probably reasonably well placed to make that kind of commitment, not least because they do have a very large bio-mass resource and a pretty large hydro resource, and so they probably can say, "We are going oil free", which is not to belittle the commitment - it is still a very big commitment and if they achieve it they will only achieve it by developing technologies which can then potentially be useful for the rest of the world. I wish them well, but I suppose I am less impressed by that commitment coming from the Swedes than I would if it came from the UK Government, when it would be a very, very big commitment indeed because we are much less well endowed with the kinds of resources that would enable to us complete it. I do not see why it should have any necessary effect on the competitiveness of Swedish business at all. One imagines that it will stimulate an innovation process away from oil and they will become even more energy efficient than they are already. They will develop these technologies to use other different kinds of fuels and they will specialise in those industries that are good for them, and if those technologies then have a good export market, they will export these technologies to the rest of the world rather like the Danes have with their wind turbines. That is the sort of thing I was meaning about how carbon mitigation need not be expensive at the macro level, provided you can engage innovation, creativity and get investment into the right technologies for the future.

Q163 Mr Caton: It looks like our government is relying increasingly on emissions trading for delivering carbon savings cost effectively. How effective have the UK and EU emissions trading systems been so far?

Professor Ekins: It depends really how you define "effectiveness", in the sense that the environmental effectiveness of an emissions trading scheme is calculated at the beginning when you decide how many permits you are going to issue, because that will then tell you how much carbon there is going to be in circulation. The great advantage of the emissions trading scheme is that you do that calculation at the beginning instead of relying on the price mechanism to adjust the carbon emissions as one will. I think one of the big lessons of both those emissions trading schemes is how not to allocate permits. The allocation of permits in the UK case, I have to say, you could perhaps justify the whole scheme as a way of public policy learning, and I think it probably did position the UK well when the EU scheme was introduced, but it certainly was a very expensive way of producing carbon. Very large subsidies were paid to a number of quite large companies to do emissions reductions that most of them would have done anyway, and that was a very expensive way of reducing carbon emissions. We would not want to allocate permits like that again. Similarly, with the EU scheme, it was a slightly less, it was a quite different way of allocation, but, I suppose, to cut a long story short, I would say that we have to be moving in the EU scheme towards auctioning of permits because that is the only economically efficient way of doing it, and it will be made more easy by the second phenomenon that we can see in the EU scheme, which is that, even though the companies have been given the permits, they are including the permit prices in their pricing strategies to the extent that they can. This is particularly apparent in the electricity industries. Electricity industries across Europe are charging their customers for the cost of their permits, because they represent a real opportunity cost to them, even though they were given those permits free of charge, to the extent that they are able to. There is some debate as to whether they are charging 60 per cent of the price of the permit, or 80 or 90 per cent of the price of the permit, but it is quite clear that a large proportion of the price of the carbon permit is going into the price of electricity to the consumer even though those permits were given away free of charge. That is a political problem in some countries. It is not so much of a political problem in the UK for some reason as yet, but what it does mean is that if we were to move towards auctioning of permits, we have already seen the price increase that one might expect, or a large part of the price increase that one might expect from such auctioning, and effectively all that would be doing would be taking windfall profits from the companies that were given the permits back to the Government in terms of revenue, and that would be an example of a tax shift of the kind that I was talking about right at the beginning.

Q164 Mr Caton: Do you think it is likely that the UK will set a really challenging emissions cap for phase two?

Professor Ekins: I think "really challenging" is obviously a kind of relative terms. I think it is unrealistic to think that the UK cap will be way out of line with the cap that people perceive as being set in other countries. At the same time, I think that the Government said for phase one that it was going to set a cap that was consistent with the 20 per cent carbon reduction target, I imagine it might say the same for phase two, and, if it did say that, then that would be quite a challenging cap compared with what other countries have said they are going to achieve, because most other counties are nowhere near reducing their carbon emissions by 20 per cent on 1990 levels, as you probably know. It depends. If they stick to the formula of phase one it could be a relatively challenging cap, but obviously there are international considerations which will also come into play.

Q165 Mr Chaytor: Is there any chance at all that aviation will enter the scheme for 2008?

Professor Ekins: I think it is unlikely to get in for 2008, but the Government has said that it would like it to and the Commission certainly says it wants it in before 2012. I am not quite sure what the implications are to have that extra sector joining halfway through. My feelings about aviation entering the scheme is that whether or not it has any environmental benefit will depend entirely on how many emissions permits are allocated to it. If it is allocated its current level of emissions plus an estimated five per cent per annum growth, then clearly this will simply not constrain it at all.

Q166 Mr Chaytor: If the cap is too feeble, what are the alternatives to deal with aviation? You obviously feel that people's behaviour should change and they should not be allowed to fly from Doncaster to Bergerac. What alternative methods are there to deal with that?

Professor Ekins: I do not quite agree with that characterisation of my position. I feel very strongly that five per cent per annum growth in aviation is completely and utterly unsustainable and inconsistent with climate targets. If we were able to maintain aviation emissions at their current level (in other words people flying no more than they currently do), that would be an enormous achievement for the climate, and I think that policy should be directed towards that goal. That does not mean that no-one flies anywhere, because a lot of people fly quite a lot. I would not want to be characterised as saying that people are not allowed to fly from here to there. I have long been an advocate of emissions charging for the aviation sector. It is something which is very closely directed to the pollutants that we are concerned with. It is something that can be calculated very easily from the technologies of the aircraft. We know how much carbon knocks and the other pollutants produce on the basis of the aircraft technology.

Q167 Mr Chaytor: Is that a charge on the airlines directly or is it a landing charge?

Professor Ekins: No, it is a charge on the airlines depending on where they have come from, how long their flights have been and the kind of formula that was included in that DFT Treasury paper whereby the length of flight of every landing aircraft is taken to be half the distance of the place from which it has come, and you would then calculate the emissions over that portion of the flight and your charge will not be related to that.

Q168 Mr Chaytor: How do you deal with the point that in British terms that will simply divert international flights from Heathrow to Charles de Gaulle?

Professor Ekins: It would have to be done on EU basis, and if you were to do it on an EU basis you would achieve an absolutely minimal diversion of flights because people have got to come somewhere in the EU. The European Commission has, in fact, studied that proposal very closely. At one point one thought that they were going to be quite close to recommending it. It is clearly not against the Chicago Convention, as the taxation of aviation fuel is, and it clearly could be done. Both I and the Royal Commission, when it produced its special report on aviation, recommended that that was the right way forward. I am not against including aviation in the Emissions Trading Scheme, but at the moment we have heard nothing about the tightness of the cap that it will be given when it goes in, so we have no idea what kind of environmental improvement its inclusion in the emissions trading scheme would yield, and until I see that obviously I am completely agnostic as to whether it is a good thing or not.

Colin Challen: I just wondered as a follow up, perhaps a little frivolously, whether you think the new airline service between Cambridge and Oxford servicing a very high IQ rational number of professionals will ever get off the ground?

David Howarth: It will get off the ground.

Q169 Colin Challen: There is no need to answer that. I note that the title of the now published Exeter Report of the conference last year is called Avoiding dangerous climate change. It is not called "Avoiding Climate Change". That suggests that they accept that we have gone beyond the tipping point in this process. In the light of that, do you really think that tapping a few fiscal dials here and tweaking a few taxation knobs there is anywhere near radical enough in addressing this problem? Should we not have a far more radical solution, such as domestic tradable quotas?

Professor Ekins: I think that fiscal knobs and emissions trading schemes can be made pretty radical, and I think that they would do a lot to engender the kind of awareness of this issue which, I think, is the principal stumbling block to the implementation of domestic tradable quotas. I think that is, in an ideal world, a very desirable state. I think it would be wonderful if every individual was brought up to recognise that they had a certain quantity of carbon which they could emit over the course of the year, they knew how it was stored, they knew how every transaction that was carbon-related would lead to a subtraction from their store for that year and they were able to budget through the year for their carbon and then, if they find themselves with a surplus at the end of the year, they could sell it to someone who needed it.

Q170 Colin Challen: Given the dire consequences that we are facing, this is not talking about utopia, it is talking about something that is absolutely essential, and taxes will never fulfil that role of educational purpose on their own. Taxes are usually regressive, so, unless you introduce a carbon tax credit scheme - and we know that those tax credits are very effective and efficient and never have any problems - that will not address that problem that you have put your finger on in terms of getting people to value carbon?

Professor Ekins: There are lots of different ways of increasing awareness. I think tackling energy use in the home, tackling energy use in transport directly through awareness raising schemes, using the price mechanism, though perhaps not using a carbon tax for energy use in the home, is one way of doing that. My own feeling is that there is a long way to go. A domestic tradable quota is essentially introducing a parallel money system, as you are well aware, because I know of your interest in this area, parallel money systems are difficult. They are confusing. Money is pretty confusing to quite a lot of people, and, as we have seen from the level of bankruptcies recently, quite a lot of people are not very good at handling money, so introducing a parallel money system and getting people to understand what their budget limit is and what the implications are if they overspend and enforcing it - because presumably you will fine them in some way if they overspend, if they do things that they cannot afford - will require an enormous change in people's perception as to what the climate issue is all about, and I think that it is going to take us some time before we get there.

Q171 Colin Challen: You are not saying that those problems are insurmountable?

Professor Ekins: Not necessarily, no. In an ideal world, I think that would be a very desirable way to go. I think another issue, which is often taken as read and on the advocates of DTQs, is how you should distribute them. I have never heard of any suggestion that they should be auctioned as we suggest that the EUETS permits might be auctioned, that people should actually buy them up front. They are going to be allocated in some way, and the normal allocation scheme is through equal per capita allocation. That is the one I have heard recommended most often. The redistributive implications of that are enormous, they are absolutely colossal, because the differences in carbon use, even within the income distribution of a particular decile, but across it from the very poorest who use least energy to the very richest who use most, if you give equal per capita allowances, the redistributive impact of that will be absolutely enormous. I think we are some way, firstly, from understanding the extent of that impact and certainly some way from agreeing it to be politically desirable. Redistribution is, in my experience, quite a controversial political issue.

Q172 Chairman: The Conservative Party has recently declared itself in favour of redistribution. The effect of what you describe would be very progressive. Given these quotas would be tradable, it might remove the need for tax credits, because the poor people might have such a surplus of quotas that they would be auctioning them to the rich people at a huge price. You could solve all sorts of problems by this imaginative scheme, but I think it is a bit late in the afternoon to start on that now. Can I thank you very much for coming. We have covered a lot of interesting ground this afternoon and you have helped us a lot with the report. I am sure we will see you again in due course. Many thanks.

Professor Ekins: Thank you.