Memorandum submitted by Friends of the
Earth
INTRODUCTION
We welcome the opportunity to give evidence
to this inquiry.
The first part of our evidence covers the Stern
Review and the Government's response to it so far. The rest of
our evidence looks at the Committee's questions on aviation taxation,
the Barker Review and companies' environmental reporting requirements.
1. STERN REVIEW
We hope that the Stern Review will be a turning-point
in the fight against climate change. The scientific case for action
has been getting stronger with every passing year, however set
against this has been the strong prevailing belief that action
to stop climate change would be bad for the economy. This belief
has been perhaps the biggest barrier to action. The Stern Review
turns around this consensus by arguing very strongly that in fact
it is far better for the economy to act now, rather than to wait.
The costs of action are given as 1% of annual global GDP, with
the costs of not acting 5-20% of annual GDP.
The Stern Review goes on to make four broad
points:
— Urgent, strong action is needed
now to prevent these costs (eg p 208).
— There is not necessarily a conflict
between tackling climate change and economic growth. Indeed, the
report states "climate change is the pro-growth strategy"
(pviii)
— A global response is needed,
involving all countries.
— To tackle climate change, Government
intervention is needed—through taxes, trading, regulation,
subsidy and information. Climate change is described as the "greatest
market failure the world has ever seen"—a wide
range of policy interventions are needed to address it.
The Government seems to be using the Stern Review
predominantly as ammunition in international climate negotiations.
We welcome this, however the Stern Review also makes a strong
economic case for domestic action. The Stern Review—in
two detailed chapters (11 and 12)—sets out the case that
although multilateral action is necessary, unilateral action need
not be bad, and can be good, for a country's economy. This point
is being downplayed by Treasury ministers, who are putting almost
all emphasis on multilateral efforts. Chapters 11 and 12 make
four broad points:
— The longer we wait, the more
costly the economic transition will be.
— There is very little macro-economic
threat to the UK from moving more quickly.
— There are major opportunities
in new markets from moving quicker.
— There are major opportunities
in rooting out economic inefficiencies; at a company level from
being more efficient, and at a national level by removing inefficient
subsidies.
The analysis in Stern is that action on climate
change is a massive economic opportunity for the UK. Also, in
addition to economic benefits around stimulating innovation, improving
resource and energy productivity, and reducing the economic and
social costs of future climate change, there are other ancillary
benefits from reducing our dependence on fossil fuels, for example:
— Reducing the UK's vulnerability
to the global volatility of oil markets and supplies.
— Reducing the UK's balance of
payments deficit.
— Reducing dependence on energy
supplies from unstable parts of the world.
— Massive potential for job creation
in renewable technologies and energy efficiency.
In this respect, it has been very disappointing
to see so little Government response to the Stern Review on national
policy. In particular, there was very little action from the Chancellor
in the December 2006 Pre-Budget Report, his first opportunity
to respond to Stern. £5 on a cheap flight and an in-line
with inflation rise in fuel duty were the limits of his ambition
on green taxation—this is hardly the type of action that
creates the economic incentives for a transition to a low carbon
economy.
We hope that the Committee will ask the Chancellor—as
a national response to the Stern Review—to implement a national
climate change strategy to deliver a low carbon economy. We suggest
that the main elements of a successful strategy would be:
— Set annual budgets for carbon,
which fall year-on-year, driving emissions down.
— Set up national carbon accounts,
as a central part of the national accounts.
— Use its range of policy instruments
as part of a strategy to affect emissions in all sectors of the
economy.
— Have an annual review of policies
to ensure that this budget is kept to, adapting policies accordingly.
Aside from the broad analysis of the net economic
benefits of acting now on climate change, there are two other
points in the Stern Review which should cause changes to Government
policy.
1.1 Social cost of carbon (SCC)
The SCC is routinely used by Government to determine
what level of carbon emissions to allow in specific policies and
projects—for example the determination of appropriate Building
Regulations; levels of recycling in the Waste Strategy; whether
airport expansion is acceptable. The Government currently uses
a figure of £70t/C, based on its 2002 literature review of
climate impacts. Friends of the Earth has argued before that this
figure is far too low—it is based on the use of a high discount
rate, weak treatment of uncertainties, and narrow coverage of
environmental impacts. The Stern Review argues strongly that these
issues deserve better coverage, and it recommends a figure for
SCC of $85 t/CO2, which equates to £238 t/C—over three
times the current figure. If implemented, this would have a major
effect on policy appraisal across Government, and mean far greater
likelihood of policies and projects which cut carbon emissions.
This new proposed figure is in essence down
to three changes:
— It is based on more up-to-date
science.
— It is based on a lower discount
rate. We note that this is not a "scientific" issue,
but an "ethical" one. Stern states that the lower rate
used reflects "the view that this rate should be based
largely on the probability that future generations exist, rather
than their having some more lowly ethical status".
— It covers a broader range of
impacts. The 2002 review was based on a literature review of studies
which only cover a small range of the total impacts of climate
change.
There still remain difficulties with using SCC—not
least that it institutionalises the trade-off of different policy
objectives, which is conflict with the Government's Sustainable
Development strategy that policy objectives should be integrated.
However, this higher SCC gives a more accurate reflection of the
actual damage from climate change, and is far more appropriate
than the current £70tC figure.
So far, it is not clear what the process is
for determining whether a new SCC figure should be put in place.
A parliamentary answer from John Healy MP from 18 December 2006
said that Government was "in the process of reviewing"
the social cost of carbon—we advocate that this should be
resolved before Budget 2007, used for policy and project appraisal
at Budget 2007 and beyond, and applied retrospectively to major
policy areas to determine whether policy review is needed.
1.2 Policy instruments
The Stern Review is very clear that climate
change is a problem caused by market failure. It argues strongly
that a range of policy instruments—from market measures
like tradable permits and taxes, through to Government spending,
use of regulations and better information—will all be needed
to tackle climate change. In other words, Government intervention
is essential to tackle climate change. The Stern Review states
that tackling climate change is the pro-growth strategy. So the
clear inference is that to get a strong economy, Government intervention
is required. This is at odds with the Government's current deregulatory
focus—where for example stronger building regulations are
dismissed as "unnecessary gold-plating", the land-use
planning system is attacked (through the Barker Review) as an
inefficient and bureaucratic hindrance to growth, and interventions
generally—whether regulatory or fiscal—have an unwarranted
taint of being "bad for competitiveness and UK plc".
This is writ large into the Cabinet Office's Better Regulation
agenda—for example in the Autumn 2006 consultation on Regulatory
Impact Assessment where it says that "the new impact assessment
is aimed at focusing on whether regulation will impose an unnecessary
burden on the private, public or third sectors".
In fact what Stern is saying is that free-markets
failures are the cause of problems which will have major negative
impacts on the economy. Markets have a central role in all economies,
but these markets must be managed well. There is a strong central
role for Government intervention to tackle climate change and
deliver strong economies. We hope that the Stern Review starts
to signal the end of the erroneous belief that generally interventions
are bad and to be avoided. On the contrary, it is Government inaction,
and letting the free-market rip, which is the problem.
2. AVIATION TAXATION
The Chancellor's increase in Air Passenger Duty
(APD) is too small to deliver much environmental benefit.
The increases only restore the lowest level
of APD to 2000 levels (ie lower in real terms than in 2000). The
increases will not even stabilise emissions (as the EAC recommended),
let alone reduce them. APD will still bring in only £2 billion
a year, compared with the £10 billion annual tax exemptions
(from VAT and fuel duty exemptions). This year's increase (the
first in six years) does recognise that APD increases can deliver
environmental benefit, and would be welcome if it was to be followed
up in Budget 2007 by a commitment to an APD escalator, to curb
the demand growth for flights. This is particularly necessary
now as ETS is not due until 2011 and even then will only slightly
reduce passenger growth, and because it is crucial to stop "air
dependency culture" before it becomes entrenched. We also
advocate that the rise in APD is explicitly linked to a combination
of tax cuts in other areas (for example employment taxes) and
to environmental spending—for example providing grants for
people wanting to cut carbon emissions in their homes. APD rises
could provide the funds for a major push for households in helping
them cut their carbon emissions at home.
We do not support the use of APD revenues to
provide a fund for R&D for new aviation technologies as some
have suggested—giving this revenue back to the aviation
industry would be against the Government's "polluter pays
principle". The industry is quite capable of funding its
own research programme. In this respect, reform of APD so that
it reflects environmental damage more, would create an incentive
for the aviation industry to step-up its R&D effort. We note
however that new technologies will take decades to diffuse through
the fleet, so that other action—in the form of slowing demand
growth—is essential.
Other reforms of APD—such as charging
per plane to encourage better load factors, and extension to cover
air freight (not currently covered) would all be beneficial, but
the main area needed is for the Chancellor to commit to an APD
escalator as part of a overall climate change strategy.
On other areas of aviation policy, it was disappointing
that there was:
— No commitment to remove the
(Government recognised) anomaly of fuel tax exemptions for domestic
flights. The UK has the greatest number of domestic flights in
the EU, despite being a small country.
— No commitment to work to remove
the anomaly of fuel tax exemptions on international flights between
UK and second countries in renegotiated bi-lateral air service
agreements.
— ETS proposals are only for 10%
auctioning from 2011, with gradual increases in future. This is
well short of the Stern recommendations for greater use of auctioning.
3. CARBON FROM
BUILDINGS AND
THE BARKER
REVIEW
3.1 Overview
Planning and building regulation can make a
major contribution to CO2 reduction. These are powerful and complementary
measures. While some of the actions announced by DCLG on using
these mechanisms are welcome, more effective delivery in shorter
timescales is possible. The final Barker Report will significantly
restrict the ability of planning to deliver on climate because
its recommendations will give more emphasis to business interests
and deregulate important planning functions.
3.2 Building regulations
Building regulations have the capability to
ensure that new housing is built to carbon zero standards through
detailed regulations on energy efficiency and micro energy generation.
The Code for Sustainable Homes published in December 2006 was
announced as a voluntary initiative which signalled the direction
of travel for building regulations so that the most demanding
code standards (Carbon zero) would be incorporated into building
regulation in 10 years. Friends of the Earth is concerned that
this timescale does not meet the challenges set out by climate
science for greater and faster CO2 reduction (See Tyndall Centre
Research 2006). We regret that the code is voluntary and that
it fails to tackle the reform of standards for commercial and
public sector development.
3.3 New planning guidance
The proposed new Planning Policy Statement:
Planning and Climate Change supplement goes some way to maximising
the potential of the planning system to deal with climate change.
The document contains a framework for estimating CO2 emissions
from new development and for setting bench marks for reductions
in the built environment. The policy is also actively supportive
of renewables projects. The policy sees regional and local spatial
strategies as shaping "the framework for energy supply in
their area" (para 1.11, Introduction). In addition "development
plan documents (DPDs) will set policies on the provision of low
carbon and renewable sources of energy to provide the platform
necessary for securing and complementing the increasingly high
levels of energy efficiency required by Building Regulations"
(para 1.11, Introduction). The extent of the planning authority's
ability to enforce these policies is clearly stated as "where
proposals are inconsistent with the policies in this PPS, consideration
should be given to how they could be amended to make them acceptable
or, where this is not practicable, to refusing planning permission."
(para 28).
3.4 The impact of the Barker Report
The policy framework put forward by the Planning
and Climate Change supplement, and the Code for Sustainable Homes
are undermined by the recommendations of the Barker Review. A
more detailed assessment of Barker available on request. In short
the recommendations of the final report (and the analysis in the
body of the report—see para 1.15) are for a presumption
in favour of development outside of the plan (recommendation 1),
and an emphasis on economic factors (recommendation 2) and including
price signals (see Box 1.1 on page 24), removing the needs test
for retail development, and emphasising cost and benefit analysis
(recommendation 4). They are therefore directly contrary to making
decisions based upon carbon emissions reductions and sustainable
development criteria, as they emphasise economic growth over other
environmental considerations.
One example of how the recommendations would
weaken the planning frameworks ability to deliver carbon reduction
is in relation to Sustainability Appraisal. The Planning and Climate
Change supplement to PPS1 envisages Sustainability Appraisal as
important, particularly in encouraging "regional planning
bodies as part of their approach to managing performance on carbon
emissions, to produce regional trajectories for the expected carbon
performance of new residential and commercial development"
(para 1.7, Introduction). The Barker Review however in Recommendation
15 suggests "streamlining of Sustainability Assessment
(SA) process including removing or reducing requirements where
a related higher tier policy has already been subject to SA and
exploring how SA requirements can be streamlined for Supplementary
Planning Documents; " a move which removes important
environmental safeguards and will not be effective in assessing
whether policies and decision-making on applications for development
will actually result in the reduction of carbon emissions from
development or retrofit.
4. COMPANIES'
ENVIRONMENTAL REPORTING
REQUIREMENTS
4.1 Background
In our written evidence submitted to the Environmental
Audit Committee's inquiry into the 2005 Pre-Budget Report, Friends
of the Earth highlighted our disappointment at the Government's
decision to abolish the requirement for listed UK companies to
publish an Operating and Financial Review (OFR). Introduced in
March 2005, the OFR regulations would have required companies
to annually disclose non-financial information on company performance,
including on environmental and social issues where these were
material to the company's business.
As we highlighted in last year's submission,
the OFR would have constituted a major step forward in terms of
corporate transparency and accountability in relation to environmental
impacts. Although the primary audience for the reports was existing
company shareholders, the reporting requirements would have helped
to make a company's board and its wider stakeholders—including
employees, consumers, and potential investors—more aware
of any negative environmental and social impacts associated with
its activities, thereby increasing the likelihood that companies
would take steps to improve their performance in these areas.
The OFR regulations had been due to be incorporated
into the Companies Bill (previously the Company Law Reform Bill),
along with similar but less stringent non-financial reporting
requirements required under EU law. The latter—originating
from the EU Accounts Modernisation Directive—required quoted
companies to include non-financial information in a Business Review
as part of their annual Directors' Report. However, the reporting
requirements of the Business Review were significantly weaker
than those of the OFR in a number of key areas, including in relation
to the provision of information on environmental matters, reporting
standards, and auditing requirements.
4.2 Progress on environmental reporting in
2006—two steps backwards, one step forward
With the passage of the Companies Bill through
Parliament in 2006, some progress was made in strengthening the
non-financial reporting requirements in the Business Review to
fill the gap left by the OFR. Following Friends of the Earth's
launch of Judicial Review proceedings into the decision to abolish
the OFR, [1]and
a major campaign to strengthen the environmental and social provisions
in the Bill by two civil society coalitions, the Corporate Responsibility
(CORE) Coalition and the Trade Justice Movement, the Government
brought forward amendments to the Companies Bill to expand the
range of issues on which companies will have to report in their
Business Reviews.
The Companies Act 2006, which received Royal
Assent on 8 November 2006, requires that quoted companies annually
disclose information on environmental matters (including the impact
of the company's business on the environment) to the extent necessary
for an understanding of the development, performance or position
of the company's business. It also requires companies to disclose
information on:
— Their policies in relation to
environmental matters;
— The effectiveness of those policies;
and
— Persons with whom the company
has contractual or other arrangements that are essential to the
business of the company (except where "disclosure would,
in the opinion of the directors, be seriously prejudicial to that
person and contrary to the public interest").
4.3 Key outstanding issues
The audit requirements for the Business Review
remain weaker than those for the OFR, with no requirement in place
for auditors to consider whether any other matters had come to
their attention during the course of the audit that were inconsistent
with the information provided in the Business Review.
Furthermore, there is no statutory reporting
guidance for the Business Review. Mandatory reporting standards
ease compliance with narrative reporting requirements by providing
guidance and clarity for companies on what information to include.
They also help to ensure comparability of reports and facilitate
assessment by interested parties of a company's relative environmental
performance vis-a"-vis its competitors, and its own progress
in this area year-on-year.
However, despite calls from a diverse range
of stakeholders for the Government to provide mandatory reporting
standards for the Business Review, none are included in the Companies
Act 2006. The Government has committed to review the need for
a mandatory reporting standard two years after the new non-financial
reporting regulations come into force, but this is still disappointing
given that the OFR regulations were accompanied by a mandatory
reporting standard issued by the Accounting Standards Board (ASB).
Overall, it is regrettable that the Government
did not take greater advantage of last year's major reform of
UK company law to put stronger regulations in place in relation
to the transparency, accountability and responsibility of UK companies
for their environmental and social impacts. Despite the improvements
to the Companies Bill, which as a whole represented an important
step in the right direction for UK corporate accountability, the
environmental reporting requirements on UK companies are still
weaker than they were under the OFR regulations.
4.4 Recommendations
Friends of the Earth believes that mandatory
environmental reporting is one of the essential first steps to
ensuring improved environmental performance by UK companies. In
order to provide a level playing field across business and
sufficient incentives for all companies to take their environmental
responsibilities seriously, we believe that the following progress
on environmental reporting requirements is essential:
— Extension of reporting requirements
to cover all large and medium-sized public and private companies
(with reporting to be consistent with the size and complexity
of a company's business operations).
— Introduction of mandatory reporting
standards for the Business Review through the publication of statutory
guidance developed in consultation with all interested stakeholders.
— Removal of materiality requirements
so that information on environmental impacts, including carbon
emissions, is not limited to that which is considered to be material
to the company's business (as is the case with the Business Review).
— Introduction of stronger audit
requirements for information on environmental impacts in order
to ensure the accuracy of the information provided by companies
in their non-financial reports.
5. OTHER ASPECTS
OF ENVIRONMENTAL
TAX AND
INCENTIVE POLICY
We were disappointed that the PBR contained
so few new initiatives, particularly given the Government's failure
to bring carbon emissions down over the last 10 years. In particular,
there was a major opportunity missed to use new tax revenues to
make it cheaper and easier for individuals to take the greener
option. We attach below as an annex our December 2006 summary
of the PBR's environmental measures.
1 This legal action was settled out of court following
a commitment by the Government to reopen and widen the consultation
on the reporting requirements in the Companies Bill: http://www.foe.co.uk/resource/press_releases/friends_of_the_earth_force_02022006.html Back
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