Examination of Witnesses (Questions 20-29)
SIR NICHOLAS
STERN AND
MS LORRAINE
HAMID
16 JANUARY 2007
Q20 David Howarth: Of course if it
is the reverse that means it could be lower?
Sir Nicholas Stern: If it turns
out we are going to push up the growth rate, we have it at 2%,
slightly less, if the growth rates for the world had been higher
than that; if you pushed it up of course then you get more emissions
earlier than we assume. I do not think a low growth assumption
gets you off the particular hook of the need for early action.
Q21 Mark Lazarowicz: In your Report
you emphasise the importance of carbon pricing as a policy to
tackle greenhouse gas emissions. Are you concerned there is a
bit of tendency to regard carbon pricing and emissions trading
as an easy and simple solution in terms of the way it has been
pursued in the policy debate in the UK and elsewhere? Is it not
the case that to make an impact there will be occasions where
the impact of carbon pricing means significant increase in costs
in certain sectors? Do you think there has been sufficient awareness
amongst policy makers? Do you think there is the real commitment
amongst politicians Europe-wide to actually make the changes to
introduce a level of carbon pricing which would have those significant
cost impacts?
Sir Nicholas Stern: You are right
that opening up to trading brings the possibility of bringing
costs down. That is the point; that is the idea. You want to try
to bring the costs of reducing carbon down as much as you can;
whilst at the same time you want the price to be sufficiently
high to give people strong low-run incentives to produce carbon.
I think the way you bring those two together is very strong targets
in the rich countries. We point to 60 or 80% reductions by 2050.
We marry, as it were, strong ambitions with the openness of trade
and thereby bring costs down and giving incentives for developing
countries to come in. You have to put those two things together—the
ambition and the openness, together with the long-time horizons
that people need for decision making, which I emphasised as well.
I do not think it is fantastically simple. Anybody who has tried
to explain cap-and-trade to somebody in the pub would not necessarily
immediately regard it as simple; but I think it is a testimony
to the way in which it has got working that people have got to
grips with it quite quickly, even though it is a moderately complicated
economic idea. Trading is not the only route. Taxation is one
route; and various forms of regulation, which of course put up
the cost of doing things, whilst bringing down carbon—so
it is an implicit price; and regulation should be part of the
package as well. I think international standards for electrical
appliances, cars, airplanes and so on, also for methods of electricity
generation. I think some aspects of international standards will
be a very important part of the story. National standards of course
are coming in directly with new houses being carbon neutral within
a few years. So I think you have to see cap-and-trade as part
of the story, along with taxation and regulation and standards,
and they all have their roles to play.
Q22 Mark Lazarowicz: Can I put my
question in the specific context of the EU scheme. From your comments
earlier in the evidence session, I take it that you are fairly
positive on the proposals that have come forward from the Commission
recently. Is that the case? If not, are there any areas in which
you think the Commission proposals need to be tightened up and,
secondly, from what you have said is it right to conclude that
if the European Union were to adopt anything substantially below
the figures proposed by the Commission that that would be a long
way short of what was required to tackle greenhouse gas emissions?
Thirdly, given that only one country in the EU, the UK had its
national allocation plan accepted, does that not indicate a worrying
lack of commitment at European level as a whole to actually put
the type of policies into practice which are required?
Sir Nicholas Stern: I think the
Strategic Energy Review which was published in the last few days
from Europe does point to a level of ambition which I think is
higher than we might have expected a while ago. They are talking
about 20% reductions by 2020 and 30% if they see movement elsewhere.
The Chancellor at the time of the launch of the Review pointed
to 30% and that is obviously in the context of a move to 2050
to reduce by 60% or more, so if we did get a 30% reduction by
2020 for Europe that would be a major step along the way to the
60 to 80% reductions that we talk about by 2050 in the Review,
so I think we are starting to see a level of ambition in the right
ball-park in relation to the kind of ideas we floated in the Review.
However, we are early days on this and we are learning from experience
as Europe. We learned that the excessive handout of rights to
emit led—surprise, surprise—to low prices of carbon,
and that experience in phase one has led to the emphasis on tightening
in phase two, and I think the bigger ambition in phase three,
but that is something where the countries involved have to be
strong in their ambitions and push those arguments very strongly
because there will always be vested interests who want to have
higher allocations for themselves, and I think governments have
to grasp that nettle.
Q23 Mark Lazarowicz: What does the
review by the Commission of the Emissions Trading Scheme need
to do if it is going to provide a foundation for the global carbon
market which you have identified as being important?
Sir Nicholas Stern: In a moment
I will ask my colleague Lorraine Hamid, who has worked with her
European counterparts from the DTI and so on, if there is anything
she wants to add, but the principles that we set out in the Review
I think are clear. It has got to be ambitious in terms of the
level of action, and that is essentially the 60 to 80% that we
discussed by 2050, and be strongly on the way by 2020. It has
got to be ambitious in that sense and the Chancellor pointed to
the 30% reduction. It has got to be open to trade and we have
to think very hard about the technicalities of how we link up
our schemes with action in other countries because not everybody
will have schemes outside Europe which work in the same way. We
hope such schemes will develop but they will not all work in the
same way and it is very important to design schemes in a way that
they can link up and facilitate trade, and in particular link
up with the developing countries to promote that flow of carbon
finance. So it is the technicalities of being open and the Chancellor
has suggested a conference in the next few months precisely on
that issue which has to be hammered out internationally.
Q24 Joan Walley: On that very specific
issue could I just follow up on that because one of the things
we looked at when we were out in Brussels was the third phase
of the EU ETS scheme and the particular concern about intensive
uses of energy by companies like for example the ceramics companies
in my own constituency, and whether or not at a future stage it
will be possible to have some kind of border tariffs so that companies
in this country or in Europe would not be put at a real disadvantage
because other companies elsewhere were not restricted to carbon
in the way that companies are here. Have you got any views on
those kinds of tariff arrangements which are under consideration
at the moment?
Sir Nicholas Stern: The competitiveness
side of the story, which is how much are you putting your costs
up relative to other people, has to be quantitative and we argue
that strong action would average out—or at least strong
enough to get below 550 as a stabilisation goal—at around
a 1% cost increase, so given the way exchange rates move, given
the differences in wages between this country and India and China
at a factor of five, 10 or 15, a 1% on average increase in costs
is not something I think which could really be argued as having
a dramatic effect upon competitiveness. There will be a few areas—and
we point to some of them in the Review—where energy is used
most intensively, and of course one of the points of having a
price mechanism is to discourage that energy intensity, or at
least to discourage the carbon intensity in the energy. You do
not want to say everybody has got to cut back except everybody
who uses a lot of energy and carbon because that would not give
you the result of the cutting back of carbon, but you do have
an adjustment process and that adjustment process will work more
easily if all countries are moving together. That is why international
co-ordination is so important. In Japan we had very interesting
discussions with the Keidanren on how you would get international
sectoral agreement, for example in cement which is a very intensive
user, like ceramics, of energy and electricity. This issue was
raised in Monterey in the Gleneagles dialogue in early October
by a gentleman from Lafarge, the French cement company. Looking
at international sectoral agreements where the industry and the
international governments have worked together will be an important
part of managing that process. Should you eventually use, if all
else fails, border tariffs? There is an in-principle argument
that you should but it is an in-principle argument and, as somebody
who has worked on development and trade for most of my life, I
am very cautious about generating reasons for protectionism because
any argument is grabbed by those who want to be protectionist
and we know the benefits of increasing international trade. However,
there is an in-principle argument and there is the shrimps and
turtles argument which the United States itself used and which
was supported by the WTO. I do not know if you know that case,
but it was where the shrimps in some parts of South East Asia
were caught in a way that made the lives of nearby turtles rather
unpleasant and therefore it was deemed to be environmentally damaging,
very understandably, and the United States prevented shrimps from
coming in that were netted in that way and their action was upheld
by the WTO. There is an in-principle case and there is some precedence
but it would be better if we so organised ourselves not to get
there.
Q25 Mr Caton: Moving on to your reference
to speeding up technological change as part of the answer to climate
change, how much more do you think we need in the UK to do in
this respect? You have already mentioned more than once as a priority
carbon capture and storage, what else do we need to be investing
in and what is the size of the investment?
Sir Nicholas Stern: We talked
about doubling public energy research worldwide. It is very difficult
to decide on an appropriate level of research. We got to that
because energy research has roughly halved in the last 20 or 25
years around the world (and we can discuss why that might have
happened) and we said that at least in the short to medium run
we should work to restore that. We had some calculations of the
kinds of deployment supports that would be necessary to try to
bring closer to market some of those technologies which are further
from market, like solar and offshore wind and so on. I think the
Energy Technology Institute is a very important step. I think
there is around €7 billion a year in the European Union research
budgets that could be further concentrated in this area. I do
think the world needs to see a significant increase in energy
and carbon-related research in the public sector. In the past
we have found that that is pretty well correlated with research
in the private sector because obviously it is the private sector
that will be making the lion's share of the investment and developing
the technologies as well, so I think you need a significant increase.
We give some numbers in the Review. You need collaboration between
public and private and you need collaboration across countries.
The forms that collaboration can take can be more or less formal.
If you are talking about nuclear fusion, it is on such a scale
and is such a risk that you probably need formal international
collaboration. Other aspects of it can be less formal where you
just exchange information across countries. If you find out that
Japan is making really strong progress on solar, you might decide
to focus your energies elsewhere and see what you can do on wind
or hydro or wave or nuclear. So I think you can vary from the
very formal, big-scale collaborations like fusion to the exchange
of information and taking what others are doing to help shape
the context of your own work. I do think that we need to think
much harder about the details of how we take it forward because
we must have a portfolio of technologies. The answer is not going
to be just in one area. I know it is getting late, Chairman, but
there are two things I want to emphasise as important that we
probably do not have the time to discuss but I would not want
them to get lost. One is deforestation and the other is adaptation.
I guess we do not have time to extend the discussion of those.
Q26 Joan Walley: I think there is
one further issue as well, and we have just come to it and it
is as important as anything else we have discussed, and it is
that part of your report which talks about behavioural change
and what needs to be done on that. I am very conscious that you
have got other commitments but I just wondered if you could flag
up for us—and Stuart Rose has just shown what Marks and
Spencer's has to do to make behavioural change within his company—what
is the message for Government in terms of behavioural change so
that for example my constituents and people right the way across
the country who want to be part of your team in turning things
round as far as carbon is concerned, what do we need to do to
get that behavioural change off the ground?
Sir Nicholas Stern: I think sharing
information in a way that is as understandable as possible. Apparently—I
did not hear it—Stuart Rose did say on the Today
programme that he read the Stern Review over Christmas, I missed
that but I was told, and that is one example of sharing information.
The Chancellor commissioned a report, I reported to the Chancellor
and the Prime Minister the work of the report, and it has been
released and discussed. There is so much more information and
discussion there could and should be. I think that will influence
people. The schools of course over the medium term are a very
important element here and not just for when the children grow
up but for what the children tell their parents, so I think what
happens in schools is of great importance. Labelling—I had
a discussion with Terry Leahy and various people in Tesco's a
few days ago and we discussed labelling and sourcing and information
that comes through the outlets. I think there is public discussion,
there is formal education, there is labelling. Standards themselves
convey information. Once people realise that they are being required
to buy electrical appliances which use little energy on standby
then they will be recognising that the Government is taking action
in those areas. The action on carbon neutral homes, I suspect,
will make people very conscious of the issue. Right across the
board on those elements I have described from public discussions,
reviews, education, retail information, standards. I think those
are the kinds of things that will help people come to grips with
what responsibility means.
Joan Walley: I hope we will have the
opportunity to follow those up through the Committee and on the
deforestation issue as well.
Q27 Chairman: You have been very
generous with your time. Could I just put one final concluding
point to you. I think you have acknowledged that 550 ppm is the
highest acceptable target in which to aim for stabilisation. We
cannot risk allowing it to go beyond that without getting into
the realms of really quite significant chances of dangerous levels
of climate change.
Sir Nicholas Stern: We have more
than acknowledged; we have argued that.
Q28 Chairman: Okay. In Britain I
think we are pretty nearly in the vanguard internationally of
thinking about this issue and trying to work out what the right
way to address it is. Given that is the case and given that the
biggest emissions trading market in the EU at the moment has not
yet succeeded in producing a significant carbon price at a level
which will drive the low carbon activity that we need, given that
the world's largest economy still contains a large number of climate
change deniers—and you suggested three reasons why they
might try and do so but I think none of us would feel it necessary
to consider those arguments—can you really be optimistic
that the world is reacting with sufficient urgency? Your report
is probably the single most significant piece of work pulling
together the economics of climate change. Do you really feel optimistic
two months after it has been published that we are responding—and
I am not talking about the Government's but the general world's
reaction—with sufficient urgency to a crisis which eventually
threatens the survival of the planet?
Sir Nicholas Stern: I would say
just two things. I think it is moving strongly in the right direction.
Whether it will get far enough soon enough I do not know, but
it is moving strongly in the right direction, and we have discussed
a number of examples round the table this morning. The second
thing is well, how much does it matter whether you are optimistic
or pessimistic if you can point to the kind of policy arguments
and the policy directions you want to go in or you should go in?
I like to be optimistic but I think the crucial thing is to try
to argue to put the right policies in place, to understand what
they are, and to push for them.
Q29 Chairman: Right, okay. Thank
you very much indeed. It has been a most interesting session from
our point of view and it will greatly inform not just the Pre-Budget
Report that we are doing but some of our other work that we are
doing, so thank you.
Sir Nicholas Stern: Thank you,
it was a pleasure to talk to you.
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