Memorandum submitted by EEF, the Manufacturers'
Organisation
INTRODUCTION
1. EEF is the representative voice of manufacturing,
engineering and technology-based businesses with a membership
of 6,000 companies employing around 800,000 people. Comprising
11 regional EEF Associations, the Engineering Construction Industries
Association (ECIA) and UK Steel, EEF is one of the leading providers
of business services in employment relations and employment law,
health, safety and environment, manufacturing performance, education,
training and skills.
2. This note is a submission in response
to the Environmental Audit Committee's call for evidence on the
role and adequacy of emissions forecasting and cost-effectiveness
analysis in climate change policy. The note has been structured
around the ten questions posed.
1. In light of the issues raised by the NAO
briefing on emissions projections, is the Government's current
approach to forecasting "fit for purpose"? If not, what
steps should it take to ensure that future forecasts are robust?
3. EEF notes that a recent UN review gave
the government's emissions forecasting methodology a largely positive
assessment and welcomes the improvements made to the methodology
in the 2006 Climate Change Programme Review. However, the NAO[1]
rightly identifies a number of areas in which further improvements
could be made.
4. The forthcoming Climate Change Bill aims
to create a flexible long-term framework for climate change policy.
The central element will be a long-range emissions reduction target
for 2050. The government's approach to emissions forecasting will
need to adjust to this longer time horizon and the greater level
of uncertainty which will have to be dealt with as a consequence.
The main changes that will need to be introduced are:
— more regular and frequent forecasting;
and
— a broader range of modelling scenarios.
Essentially, forecasting will need to move away
from being a short-term tool used to assess a relatively narrow
range of policies and more towards being a rolling long-range
forecast which can be used to measure progress towards emission
reduction targets over a time horizon spanning several decades
rather than years.
2. In developing its approach, how should
the Government deal with the following issues:
— whether there can be a greater role
for independent assurance;
— how the Government should respond
to the unavoidable uncertainties in forecasting; and
— whether or not future domestic targets
and forecasts should include international aviation and shipping?
5. EEF notes that the EAC has previously
expressed an opinion that emissions forecasting should be undertaken
by an independent "sustainable energy agency".[2]
However, we are cautious about investing assurance of emissions
forecasts with a single organisation. Doing so might imbue forecasts
with an unrealistic sense of accuracy. Instead, "assurance"
(ie validation of the assumptions and methodology used to generate
forecasts) might be better achieved through consultation on forecasts
with as wide a range of experts and stakeholders as possible.
6. Uncertainty is inherent in forecasting.
Developing and reporting a wider range of scenarios, preferably
with probabilities attached to each, would better reflect this
uncertainty. A broader range of scenarios would be especially
valuable in the case of future fuel prices—a key assumption
in emissions forecasting. Fuel prices are notoriously unpredictable
and what later transpired to be unwarranted optimism over fuel
prices in the 2000 Review was largely responsible for the misleading
forecasts that that exercise generated. A further measure available
for addressing uncertainty is testing of the upper and lower bounds
of fuel price scenarios with market data—(eg forward prices
for fuels such as gas, electricity and crude).
7. Government should produce two sets of
forecasts—one covering "domestic" emissions alone
and one providing a more complete picture of emissions (ie including
contributions from international aviation and shipping). Whilst
current Kyoto targets and the longer-range targets anticipated
in the Climate Change Bill are based on domestic emissions, there
would be value in monitoring emissions from international shipping
and aviation. Tracking all major sources of emissions would provide
a more complete picture of the UK's contribution to climate change
and build up a historic data set that would enable emissions from
international aviation and shipping to be included in the EU ETS
at a future date. Government has already decided that all emissions
savings attributable to the UK's EU ETS NAPs will count towards
domestic targets—whether or not they are achieved in this
country.
3. As projections against the 2020 and 2050
targets are less well developed than those for 2010 but are becoming
increasingly important, what improvements are needed in their
production and use?
8. Improvement in long-range emissions forecasting
is essential because, over the longer-term, the potential for
error in the assessment of costs and benefits becomes greater.
9. Uncertainty increases as forecasts become
more long range. Assumptions must be made about how a host of
complex economic (eg GDP growth), demographic (eg population growth)
and technological variables (eg innovation rates) will develop
over several decades. Such uncertainty is best addressed through
more regular and frequent reporting (ie regular annual reports
on emissions forecasts) and developing wider range of scenarios
(see above).
10. However, just as emissions forecasting
must be more flexible to cope with the uncertainties resulting
from longer time horizons, so must emission reduction targets.
Rigid targets can be counter-productive and lead policy-makers
to introduce more costly policies than is necessary. For example,
the 2006 Review's focus on the 2010 target may have resulted in
it overlooking longer-term policies that might have delivered
more cost-effective emissions reductions over time. Long-range
forecasts can be used to validate distant targets (eg as forecasts
become more robust they may start to suggest that targets are
either set too high or too low).
11. A balance needs to be struck between
focusing on targets which are so close that a policy response
is not a practical option and those which are so distant as to
be shrouded in significant uncertainty. Medium-term targets which
are in keeping with the investment horizon and allow sufficient
lead-time for policies to be introduced that can induce behavioural
change are the most relevant.
4. Given the uncertainties associated with
the social cost of carbon, is it an appropriate basis for future
policy appraisal? What should the Government's policy on its use
now be, particularly in the significant increase in its value
which Stern recommends?
12. The "Social Cost of Carbon"
(SCC) is a value which aims to quantify the damage to society
(eg to public health, the environment and the economy) caused
by each tonne of carbon dioxide emitted. Therefore, an accurate
and comprehensive SCC would provide a very valuable yardstick
against which to assess the cost-benefit of climate change policy.
However, the National Audit Office (NAO), the Stern Review and
the academic literature on the subject all rightly emphasise the
great uncertainty over to the value of the SCC. Research to narrow
the range of estimates and improve understanding of the SSC should
be a high priority. Until such time as there is broad consensus
over the SCC, its role in policy appraisal should be limited.
13. The 2006 Review measured the cost-effectiveness
of policy by assessing its "cost per tonne of carbon saved".
Whilst a useful tool for comparing the relative cost-effectiveness
of policies, it is far from a complete measure of the cost-benefit
of a policy. As well as supplementing the assessment with a comparison
of cost versus the expected emissions savings priced according
to the best estimate of the SCC, the impact of climate change
policy on the competitiveness of business is a crucial element
of cost-benefit analysis.
5. Has the Government's approach to evaluating
cost-effectiveness in the context of the Climate Change Programme
Review been too short-term in focussing on the 2010 target? Has
this adversely affected the assessment of new policy ideas which
might only be more cost-effective in the long-term?
14. Evaluation of climate change policy
should not be restricted to the short-term and should be in keeping
with any long-range targets set by government. In particular,
assessment should include the potential scale and timing of policy.
Given the long-term nature of government targets, the latter is
especially important to ensure that policies are introduced at
the most opportune and cost-effective moment. Longer-term policies
may have little impact in the near-term, but prove cost-effective
in the longer-run (ie when assessed over the full time horizon
of government climate change policy). For example, phasing in
energy efficiency policies over time may be both more cost-effective
and more environmentally effective as technology develops over
time expanding abatement opportunities and reducing abatement
costs.
15. The 2006 Review assessed climate change
policy on the basis of an average cost per unit of benefit (ie
emissions reduction) over the life of individual policies. However,
an aggregate measure such as this conceals the fact that costs
may increase (eg as most efficient abatement opportunities are
exploited) or decrease (eg as technology development expands abatement
options) over time. EEF believes that government's approach to
cost-effectiveness should attempt to capture this complexity because
it could play a significant role in controlling the costs of climate
change policy.
6. The NAO briefing has also raised a number
of other issues, including:
— the failure to explore sufficiently
different scales of policy intervention;
— the balance between expanding existing
measures and introducing new ones;
— the range of policy options considered
and the criteria for appraising them; and
— the timing and scope of future cost-effectiveness
evaluations.
In light of such concerns, how should Government
improve its approach to the use of cost-effectiveness evaluation?
16. Government should assess the relative
costs and benefits of different scales of policy intervention
by subjecting policy scale to sensitivity analysis in the same
way as other variables such as fuel prices. The recent impact
assessment for the Energy Performance Commitment offers an example—the
impact of different eligibility thresholds, which translates into
different sized emission trading schemes, were assessed in terms
of their costs and emissions reduction potential.
17. As with emissions forecasting, given
the potential significance of the threat posed by climate change
and the resources required to address that threat, the cost-effectiveness
of climate change policies should be reviewed regularly and frequently—ideally
this should be done on an annual basis. Analysis should cover
both existing policies and new policies under consideration.
18. Cost-effective analysis of each policy,
as far as possible, should be carried out according to the same
methodology and by the same group policies to ensure consistency.
However, EEF notes that fiscal measures were excluded from the
2006 Review and considered instead by HM Treasury. Furthermore,
the NAO report noted that fiscal measures were not subject to
the same "quality assurance" as other elements of the
climate change policy package.
19. The 2006 Review decided to retain several
policies that government analysis concluded were not cost effective
(eg the Renewables Obligation (RO)). Where such policies are retained,
any alternative, qualitative, measures (eg security of supply)
used to justify then should be defined as clearly as possible
and the assessment against them made publicly available. In fact,
it could be argued that where the implied cost of carbon associated
with a climate change policy significantly exceeds the working
definition of the SCC employed by government (as in the case is
the RO) then there is a strong case for reforming or replacing
that policy to deliver emissions reductions more cost-effectively.
Even if considerable uncertainty exists around the value of the
SCC any policy purportedly designed, at least in part, to address
climate change should be seriously scrutinised if its implied
cost of carbon is in the uppermost range of SCC estimates.
20. Finally, the Better Regulation Commission
(BRC), in its response to the Stern Review, proposed seven policy
principles which the government should be mindful of when proposing,
developing and assessing climate change policies. Three of which
are particular pertinent from the perspective of value of cost-effectiveness.
21. First, policy should be tested against
a carbon price benchmark. Even in the absence of an accurate SCC
around which there is a broad consensus, the cost of climate change
policy must still be consistently assessed against a carbon price
the government believes represents value for money. Failure to
do so runs the risk of imposing unnecessary costs.
22. Second, carbon pricing policies must
be "efficient". Specifically, overregulation whereby
by the same carbon emissions are, explicitly or implicitly, priced
by two different policies. Arguably this is the case with the
Climate Change Levy, directly, and the EU ETS, indirectly, which
both price emissions associated with energy consumption.
23. Third, government should reform or discontinue
climate change policies which transpire to be inefficient or ineffective.
Climate change is a relatively new challenge and government must
guard against inertia stemming from reliance on the revenue of
an ineffectual policy or concern over the political consequences
of discontinuing an ineffectual policy in an atmosphere in which
mitigation of climate change is seen as urgent. The priority should
always be implementation of the most cost-effective policy option.
7. What additional reporting and monitoring
arrangements are required to support the aim of a transparent
framework for emissions reduction?
24. Government should publish the models
(including assumptions) and, where not commercially sensitive,
the data sets it uses to produce its emission forecasts. This
would strengthen the assurance framework by allowing stakeholders
to replicate the forecasts. It would also address the concern,
highlighted by the NAO, that the DTI model was subject to "little
detailed peer review".[3]
25. Regular reporting of emissions forecasts
and on the cost-effectiveness of climate change policies should
include a measure of the relative contributions of and impact
on each sector of the economy (ie the trend in emissions from
each sector and how the burden of climate change policy is spread
across the economy is reported).
8. What should be the roles and responsibilities
of the Interdepartmental Analysts Group, the newly created Office
for Climate Change, and the Proposed Carbon Committee? In particular,
how should the carbon committee be constituted, and what should
be its powers and remit?
26. There is limited information available
in the public domain regarding the roles of the Interdepartmental
Analysts Group (IAG) and the recently created Office for Climate
Change (OCC) (ie the body established in September 2006 to coordinate
climate change policy across government). However, an obvious
principle is that overlap between the activities and responsibilities
of these two cross-departmental bodies should be minimised. In
fact, a clear case needs to be made for the continuing involvement
of both in the assessment of climate change policy. For example,
an alternative might be for the OCC to be endowed with sufficient
analytical capability to review climate change policy without
the need for involvement of the IAG.
27. The role of the Carbon Committee should
be to provide independent advice to government on climate change
policy, to provide independent scrutiny of progress towards emissions
targets and to provide independent assessment of the cost-effectiveness
of policies implemented and proposed to meet emissions targets.
In this role, the Carbon Committee should be mindful of the climate
change policy principles recommended by the BRC in its response
to the Stern Review.
28. To ensure independence and effective
decision-making, the constitution of the Carbon Committee should
be based on relevant expertise rather than stakeholder representation.
Its members must possess the scientific, economic, legal and technological
expertise to assess climate change policy. Explicitly stakeholder-based
membership could undermine the independence of the Carbon Committee.
However, the membership must possess sufficient understanding
of all sectors of the economy impacted by climate change policy.
9. The Government wishes to "ensure that
the [Carbon] Committee's advice is transparent, equitable and
mindful of sectoral and competitiveness impacts, including the
need for secure energy supplies at competitive prices". What
use should the Carbon Committee make of cost-effectiveness analysis
and what difficulties might it face in doing so?
29. Ensuring that the burden of climate
change policy is as evenly spread across the economy as possible
will be a key role for the Carbon Committee.
30. EEF is concerned to note that the "competitiveness"
impact of climate change policy on industry is considered "non-quantifiable"
in the IAG guidelines. At the very least, this seems at odds with
the quantitative analysis of the impact of climate change policy
as part of the Stern Review. Policies that result in higher energy
prices or increase the cost of industrial emissions can significantly
affect the profitability of manufacturers whose margins are already
under pressure. EEF believes that the potential impact of ill-conceived
climate change policy on industrial competitiveness is significant
and that quantitative analysis in this area is essential. We would
be happy to work with government or the Carbon Committee in developing
an approach.
10. What approach should the Government take
towards setting short-term targets as a means of ensuring progress
towards its long-term goal of a 60% reduction in carbon emissions?
31. If, as is anticipated under the forthcoming
Climate Change Bill, long-range domestic emission targets are
introduced through legislation, then flexible interim targets
should be established to guide climate change policy and measure
progress. Short-term targets should be flexible enough to accommodate
unforeseen events (eg extreme weather patterns, rapid economic
growth and technological breakthroughs) and their frequency should
take account of investment cycles and be compatible with the timescales
of international agreements (eg the five-year phases of the EU
ETS or the 15-year time horizon of the Kyoto Protocol).
March 2007
1 National Audit Office, Emissions Projections
in the 2006 Climate Change Programme Review, December 2006. Back
2
Environmental Audit Committee, Sixth Report of Session 2005-06,
Keeping the Lights On: Nuclear, Renewables and Climate Change,
HC 584. Back
3
National Audit Office, Emissions Projections in the 2006 Climate
Change Programme Review, December 2006, p 5. Back
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