Examination of Witnesses (Questions 179
- 199)
TUESDAY 1 MAY 2007
MS KATE
HAMPTON AND
DR TONY
WHITE
Q179 Chairman: Good morning and welcome
back to the Committee. We are very grateful to you for coming
in again; I know it is not all that long ago since we last had
an exchange really but we much value your contributions. In your
memo you welcomed the draft Climate Change Bill and the increased
certainty which you hope may result from having long term targets
enshrined into law. Could you just say in practical terms what
difference you think that actually makes?
Dr White: It makes investors a
little bit more confident that Governments are going to have to
do something quite dramatic in order to change and that always
gives a bit of "Do I invest this money or not? It is a policy
risk, yes, but actually they would have to do quite an about-turn
to make them weaken it or to mean that the investment does not
make a return". Looking forward, what would cause a government
to do that, a complete change in our scientific understanding
of climate change? When you say that, people are now thinking
that it looks pretty unlikely. So this gives you a bit more confidence
that the market framework is not going to change.
Ms Hampton: Internationally what
it does is to indicate the intent of the British Government in
relation to other partners in emissions trading that we may wish
to link to, because there is not just policy risk within the UK,
there is policy risk for others who wish to link with us. So it
gives greater visibility in terms of the predictability of our
policymaking to others.
Q180 Chairman: Despite the fact that
even within the Bill there is a certain amount of flexibility
about banking and borrowing. The record on achieving targets has
been a bit patchy in the past, but those reservations are mitigated
at least by the enshrinement in law. Is that your view?
Dr White: That is correct. Also,
if you have some balancing mechanisms—we may talk about
borrowing later—that help to give you a bit more price stability
and people recognise that, then you are more confident that if
something happens, the governments will not panic because it has
already been taken into account. Markets are concerned about things
happening that are not expected, governments panicking and then
you just do not know what is going to happen.
Q181 Chairman: You have expressed
some disappointment, which I certainly share, with the scale of
the targets, particularly the long-term targets, in the Bill and—I
am quoting other people—they are going to have to be tightened
up. As there is this element of uncertainty about that, does that
have a knock-on effect on investors about uncertainty or it is
so far away that it does not really affect them?
Ms Hampton: It is more about,
the phrase we often use, "predictable fiddling". If
everybody knows why and when governments are going to intervene,
under what circumstances, using what criteria and what their levers
are, that is quantifiable risk. Business does not need absolute
certainty, it needs quantifiable risk and for a long-term target,
it would be important to do as much fiddling as you think is necessary
now, on the basis of evidence now, when the Bill goes through,
but having a review mechanism that is transparent. The key point
is that it is de-politicised and that is the interesting innovation
of the committee, that it is an attempt to de-politicise that
process. That provides greater confidence.
Q182 Chairman: What about the question,
still uncertain, of when shipping and aviation may come into the
whole process?
Dr White: To a certain extent
that is the Get Out of Jail Free card. If I am looking at phase
two of the EU ETS, yes, it looks likes it is short, it looks like
the companies in Europe are going to have to do something about
it in order to meet their targets, because even if they buy the
maximum amount of flexible mechanism allowances from the developing
world, that still will not be enough, they will still have to
take some action. However, the weather can get really warm and
maybe our emissions go down, so there is a possibility that the
market could be long again. Well, if I am a government sitting
there in 2009-10 and I can suddenly put in a load of demand, because
that is how it will be taken by the market, that gives me, as
an investor, some confidence that the Government have some levers
to make sure that this emissions trading scheme works and gives
the right price signals.
Ms Hampton: The politics of it
internationally are very, very fraught and the EU has to be applauded
for its efforts to include it because there have been huge diplomatic
pressures not to; in fact, a lot of the discussions at the moment
around the trading infrastructure and how that all fits together
have to do with the politics of a lot of countries wanting to
keep aviation emissions well away from emissions trading. It is
not an easy task and this is why it has been very slow.
Q183 Chairman: Just finally reverting
to the targets issue, does the delay in introducing proper targets
have any kind of effect on either the economics or the amount
of effort we are going to have to make eventually to achieve those
targets?
Dr White: The delay does mean
that the efforts later are going to have to be even greater which,
as an investor, gives you a little bit of confidence in so much
as the prices are likely to go up rather than down because of
that. As someone living on the planet with children, et cetera,
that does give me some cause for concern, but I can understand
that this is what is needed to get people to sign and once everybody
has signed on and seen that it is not the end of the economic
world, that actually we can survive and do well, that is the time
when you can ratchet.
Ms Hampton: The issue really is
that, if you do not have long-term visibility, people will only
invest in short-term operational decisions and this is what we
were saying last time we were here about the EU ETS. The lack
of visibility was encouraging people to focus on very short-term
measures and if you do not get the concurrent investment in the
solutions post-2020 during 2010 to 2020 for instance you will
have some carbon capture and storage in the next decade, but you
are really going to be doing a lot of learning to deploy it at
scale later and if you are not doing that concurrently with the
energy efficiency and the renewables and the other things that
you need to do now, by the time you get to 2020, you are short
of options and it becomes very expensive.
Q184 Dr Turner: Your memo is pretty
bullish about the prospects for the UNFCCC's Conference of Parties
coming up with a successor to Kyoto by 2009. What gives you this
confidence and what do you think it is going to look like?
Ms Hampton: The progress that
has been made in the US politically is a key driver and we should
not forget that. It has also been a key driver in Europe actually.
One of the reasons why the EU heads of government were willing
to agree to the targets that they did had a lot to do with the
fact that visibility is increasing in the US. Whether the US actually
signs up to the treaty, actually ratifies it, is another matter,
but it is pretty clear that they will be capping their emissions.
A number of other countries, Canada, Japan and Australia, are
essentially followers of what the US does. It is politically very
difficult in those countries to move ahead without the US, although
we will see in Canada with a change of government. This also puts
a huge amount of pressure on China and Chinese policymakers know
that, particularly as their emissions are likely to switch and
overtake those of the US. They know that that is a watershed moment.
They know that as soon as the US acts, that is also a watershed
moment. The formal negotiations will continue to be very fraught.
We are starting to see countries dig in because they know that
the discussions have begun in earnest. It is pretty clear, and
the carbon market is one of the drivers for that, that action
has to be taken soon to keep continuity in the market and that
is in everybody's interest. The debate is already starting about
what the future of the carbon market will look like and what contributions
emerging economies will provide to that.
Q185 Dr Turner: Do you think, even
if we get agreement by 2009, that will be in sufficient time to
get a small progression from Kyoto to post-Kyoto?
Ms Hampton: By 2009 is absolutely
fine, even very early 2010 might be possible. As soon as you get
beyond that, it is not enough time for national ratification processes
in a number of countries, so as you soon as you have entry-into-force
criteria that becomes difficult. If it does go beyond the middle
of 2010, then you will have to have a fix for the gap between
the commitment periods.
Q186 Dr Turner: So that timing is
critical then?
Ms Hampton: Absolutely critical.
Q187 Dr Turner: Do you feel optimistic
about that timetable being achieved?
Ms Hampton: The US elections are
the obvious thing that people think about, but, assuming that
Congress engages internationally and ramps up that engagement,
that is possible. The real problem pre-Kyoto was that Congress
was not engaged and so they dug their heels in and refused to
budge. Congress now is of a more open mind. That does not necessarily
mean that there are enough votes in the Senate to ratify an international
treaty, but there certainly will be enough votes going forward
for a cap and trade bill. It is a question of the level of ambition
of that at this point, which will partly depend on the new leadership,
partly depend on US public opinion and partly depend on signals
from China and other places.
Q188 Dr Turner: I come to the proposed
Committee on Climate Change. Obviously, you hope that it will
help ministers to make tough decisions on future policies. We
have also heard concerns that there are issues which the committee
would expect to be taken into account, which are set out in the
Bill, which run counter to this. How do you think it will actually
work out in practice and how do you think the committee ought
to be set up and run? Who should be on it?
Ms Hampton: The key issue is really
de-politicisation. Climate change policy: let us talk about improvement
from the status quo and then talk about the optimal. Any improvement
from the status quo is good because at present you tend to have
industry and environment ministries around the world—and
let us see this in the context of the UK being a model for broader
policymaking and there is a trend there—arguing a lot about
climate change policy and industry and energy ministries tend
not to include climate change objectives in their decision making
and business does not trust those decision makers always to put
what they see as short-term energy security concerns first. So
you have to have a head of government to move those negotiations
along, as we have seen through the ETS process. The Climate Change
Committee, by de-politicising the process, by giving ministers
the political space to say on an independent evaluation of the
scientific evidence and the economic issues we think is the best
way forward. Until now that has not existed. If you think about
the impact that the Stern report has had, we are talking about
a series of mini-Sterns, focused on the UK's policymaking specifically,
which will give those decision makers some political space. It
is not a panacea. You still have to have willingness of the ministers
to accept those judgments, but it is better to have a process
of independent evaluation going forward than none.
Q189 Dr Turner: That is well and
fine. If it going to be effective and if people are going to take
it seriously, then it has to have the right expertise, it has
to have the right level of independence and authority. How do
you think we are going to achieve that in its membership? The
selection is going to be critical, is it not?
Ms Hampton: The selection will
be critical but there is no shortage of climate expertise in the
UK, in fact there is probably more here than in any country in
the world so I am not worried about a shortage of expertise. The
process of selection will be key and that has to have a broad
level of political support because if the appointees are not seen
to have a broad level of political support then that makes the
committee vulnerable to political risk if there is a change of
government.
Dr White: There is another point.
You would expect the people on this committee to have some influence
with the Government about, in the old words, setting national
allocation plans, but the thing is that the UK cannot do it by
itself, it has to be done in the European context and hopefully,
touch wood, in the signing of Kyoto process or Houston process
or whatever you want to call it, so you are looking for these
individuals also to be able to argue the case extremely well at
an international level not just UK. That is going to have to be
very, very important.
Q190 Dr Turner: If the committee
comes up with judgments and recommendations which are a bit tough
to carry out and a bit politically uncomfortable for the Government
of the day, how confident are you that the Government will actually
follow the recommendations?
Ms Hampton: One would hope that
they are setting up this Bill to do exactly that; you cannot second
guess those intentions at this stage. Given the level of societal
consensus that is bringing about this kind of policy shift in
the UK, it is actually going to be quite difficult to back-track
and you could not introduce this kind of legislation in a country
where there is still an awful lot of criticism over action on
climate change or there was no societal consensus or there were
still grave concerns about competitiveness and other things. The
level of societal desire for this kind of legislation makes it
more robust and it would only be possible in places where that
does exist. If you do not believe that exists or you think that
could unravel, then it is vulnerable, but I do not feel that will
unravel in the UK.
Dr White: Having a committee such
as this also helps Government because there have been various
things thrown at the European Commission by various Member States
saying that it is a really tough national allocation plan which
is done by Brussels, not them. I am not sure to what extent that
could also be done by the Government at the time saying that these
are really tough things, but this is what the Climate Change Committee
has said and these are independent people, the best in the country
that we could find, so we will have to do it.
Q191 Dr Turner: A lot of people have
compared the Committee on Climate Change with the Bank of England's
Monetary Policy Committee. Do you think this is a valid comparison?
Are there any lessons to be learned from the way in which MPC
operates?
Dr White: That is something we
certainly put to Stern almost a year ago now. There are some parallels
there because at the moment the Government manage the inflation
using interest rates and it has given this responsibility effectively
to the MPC. People would not have given it to the MPC unless people
already had confidence in the MPC that they could do it properly.
What we shall be looking for mainly over time is for that kind
of confidence to be given to this committee but it is going to
have to earn it, there is no question at all about that. There
is a lot of similarity but it ends, I am afraid, at Dover, because
it is not going to be enough for our committee to set things properly,
it is going to have to be done in a European and a global context.
Q192 Dr Turner: One part of the MPC's
relationship with Government of course, is that the Government
set the framework for inflation and the Chancellor says it has
to be within given bounds. Obviously you could substitute emissions
for inflation, so the Government are still going to have an input
into this committee; so the committee's recommendations are in
a sense going to be pre-conditioned by the Government's expectations
as set out in statutory targets, et cetera, are they not?
Dr White: Yes, the Government
will say they want to move to this level in emissions over this
period and you have to write a letter if our emissions exceed
that over a five-year average period, or something. It is very,
very similar. The Government will say that this is the kind of
level of emissions reductions they want from the United Kingdom
and you give us recommendations to get there.
Q193 Dr Turner: Quite. The committee
is going to have to make the recommendations to the Government
about what has to be done to achieve those levels.
Dr White: And if the Government
decide not to do that, then it is transparent for everyone to
see.
Q194 Dr Turner: They have to write
a letter to the committee then.
Dr White: Effectively; yes.
Q195 Chairman: Notwithstanding your
point about this ending at Dover, which I fully understand, do
you share the sense that I have, talking both to Americans and
to people working in the EU, that we are in the lead in many ways
intellectually here about how the policy-making process should
be evolving and therefore quite a lot rides on the success of
something like this Committee?
Ms Hampton: I agree with that
absolutely and within the EU we are seeing the beginning of this
trend because people are starting to talk about more independent
institutions, independent from Member State politics, independent
from the Commission. So on issues such as verification and monitoring
of data, release of data, you need more independent institutions
and this may be the way with auctioning and so on. It is inevitable
that once you have accepted the goals, the more independent the
institutions, the more reliable they are seen to be by the market.
Yes, everybody is watching this experiment and certainly, if you
look at the way the US has created some of the institutions around
its emissions trading scheme, the transparency and regular reporting
and levers for adjustment are absolutely central to their way
of doing it. If this works, people will sign up to it in some
countries, not all, but there is a real chance that within the
EU in particular the traded sector will be carved out of national
policy making and put in a place that, over long periods, people
can rely on.
Q196 Mark Lazarowicz: In a number
of our recent inquiries, we have heard concerns raised as to the
robustness of projects under the Clean Development Mechanism.
What is your assessment of the progress which has been made to
try to ensure that such emissions credits are soundly based?
Ms Hampton: There are two things
here. There is the issue of self-correction of the CDM executive
board, which does work. For instance, when they realised that
there was an awful lot of HFC-23 out there, they decided no new
plant would become eligible, so no plants built or switching to
this technology after 2004 are eligible; there is a process of
self-correction. Beyond that, the politics of post-2012 will be
a lot more progressive than people think they will because a lot
of developed countries will require action of emerging economies
which basically means a shifting of baselines. It is quite difficult
to explain unless you are a CDM geek. At the moment CDM pays the
whole difference between business-as-usual and the reduction,
so essentially the industrialised country player is paying for
the whole environmental benefit. As we go forward, people are
talking more about sectoral mechanisms with one-way soft targets,
which means that developing countries commit to a certain level
of action through policy or through sectoral benchmarks, which
means that they are contributing to some of that difference and
they only get carbon finance for over-achievement. What you are
talking about is super-additionality as opposed to just the whole
difference between business-as-usual and sometimes you get tonnes
anyway because there is always a margin of error. If you push
the bar lower, then that means that you are going to achieve better
environmental outcomes and you are going to be supportive of developing
country policy. If the post-2012 negotiations do not have something
like that in them, then I would say that that is a major failure
of the post-2012 negotiations but those sorts of mechanisms are
now starting to come out of the discussions. A number of countries
are thinking about piloting these sorts of things. CDM will still
be around; project-based CDM will be around for countries that
do not have the data-gathering capacity or the regulatory capacity
to do more ambitious things but we would certainly expect more
ambitious sectoral programmes of other countries. The level of
supplementarity should partially depend on the level of ambition
of carbon finance globally but you cannot deny the success of
CDM in this; it really has unleashed private sector ingenuity,
going out to find tonnes that people did not know existed and
actually proving that it is a lot cheaper than people thought.
Without that carbon signal, that would not have happened and without
CDM, those, even the HFC-23, et cetera, would be vented to the
atmosphere. So the key thing is to keep the system evolving rather
than just expanding the status quo and if we can do that then
I would not have any fears about inclusion.
Dr White: Is part of your question,
if you do not mind me asking, that there has been some bad press,
to say the least, about some of these things, which is certainly
the case? Part of the problem has been that with HFC-23 you spend
a few million pounds or dollars on a plant in China and all of
a sudden the value of those emission reductions is worth hundreds
of millions in the European Trading Scheme. The way it is reported
is unfortunate. We know that the emissions reductions have been
done because under the new UNFCCC the verification and certification
process is really quite stringent. However, what is often missed
out there is that there are two things to the CDM: one is emissions
reduction and the other one is sustainable development. Because
of this, because of the way the Chinese have operated things,
a lot of money stays in China and is used as the Chinese want.
One of their major problems is social imbalance and they are trying
to improve the living conditions of people in China, which I have
great sympathy for. We have had the bad press because it has been
so cheap to do and so people have made a profit, but also the
Chinese Government have made a lot of money out of it.
Ms Hampton: They taxed it; 65%
of the revenue of HFC-23 is taken in by the Chinese Exchequer.
Dr White: The other point I would
make is that that low-hanging fruit has almost gone now and then
if you want to do CDM in these developing countries you are going
to have to do things which mitigate carbon dioxide itself and
for that you need longer periods, longer visibility and so the
economics become more akin to those in the developed world.
Q197 Mark Lazarowicz: You will recognise,
I am sure, one of the fears expressed is that if there is a big
increase of projects under the CDM, then of course that will flood
the emissions market and reduce prices in the EU and therefore
of course reduce pressure for change within the EU and the UK.
Do you think that fear then is not justified or what is your opinion
on that suggestion?
Ms Hampton: We have to think very
carefully about the signalling associated with things like the
Climate Change Bill and the ETS review which is coming up at the
end of the year. Rather than seeing them as internal policymaking,
we should see them as opportunities to signal to the rest of the
world what we think is an acceptable level of contribution to
climate change problems. The Climate Change Bill and the ETS review
are perhaps the biggest moments for us, because they are our biggest
bargaining chips. It is "We are willing to finance decarbonisation
in your countries, but we have to set out what the conditions
are going to be to allow those credits in". It is a major
strategic opportunity here and if that is used wisely, then we
should not worry about it, but if the debate is too internally
focused, then we should be concerned.
Dr White: I take your point very
much about how the market works. You get a whole load of projects
and then the price collapses; in normal commodity markets we get
this kind of price response. The difference here is that for phase
three of the EU ETS all we know at the moment is what the carbon
reductions are going to be across the whole of Europe. We do not
know how much of that is being visited on the trading sector,
so that is one negotiating hand that our Government has going
to Bali. The second one is how many allowances coming in from
the developing world will be tradable in this market. Part of
the beauty of having a climate change committee which will have
its European counterparts is that maybe how much can be coming
in is part of the thing which can be adjusted in your five years.
If there is an awful lot, then as long as you give signalling
to the developing world, that makes it a lot better than all of
a sudden seeing their prospects collapsing, the prices collapsing
and not having the investment going into the country. These are
mechanisms for trying to stabilise this new market that we have
because it is not a normal commodity market with peaks and troughs.
Ms Hampton: And you can have qualitative
as well as quantitative restrictions on the kinds of things that
you import. If the market is working well, then you should be
as open as possible, but if you are concerned that the negotiations
have not gone quite as you would have liked, then you do have
the opportunity to be more restrictive.
Q198 Mark Lazarowicz: Is that not
another argument for having fairly strict limits on how far internationally-purchased
emissions credits can contribute to meeting our own domestic targets
on the Climate Change Bill, firstly because it would stop the
effects of the market which you talked about, but also deal with
the concern that effectively we get away from making any changes
to our economy and our behaviour because we bought it all on the
international market. Is that not an argument for quite stringent
limitations, which certainly quite a few of the NGOs have called
for?
Ms Hampton: But if you take the
example, for instance, of the massive rural/urban migration occurring
in India and China, which is unprecedented in history and will
never occur again, we have one chance to build cleaner infrastructure,
to support clean urban planning, to encourage mass transits instead
of building of roads, to build clean buildings, close to zero
carbon buildings. We have one chance at that because we all know
that retrofit is more expensive. If money is sent through well-designed
mechanisms towards that kind of effort, I do not really mind whether
that slows down retrofit here, because that is a one-chance opportunity
that the whole world should be contributing to. Of course, we
will have our own objectives and that will be part of the deal;
the key thing is the quality of the investments you are doing
overseas.
Dr White: As an economist, which
I am not, but if I were an economist I would be saying, this is
a global problem, I want it done at the cheapest possible place,
therefore if it is 100% done in the developing world then that
is fine. As someone who wants to see a stable market develop,
I can see why there may be a need for some restrictions early
on but maybe they will disappear in time. I certainly take your
point that you do not want the market price collapsing because
you have underestimated the number of these allowances that will
be coming through. There will be a balance to be struck, I am
not the person to do it but hopefully this Committee will do it
with its European colleagues.
Q199 Colin Challen: I did not quite
follow the part of your answer where you were dealing with this
concept of super-additionality. It seems to me that if the clean
development mechanism is there to help developing countries go
down a green path, a clean path of development, we can see that
at the moment Africa is more or less, apart from South Africa,
excluded altogether because nobody sees any additionality to be
gained even at a low level of expectation, so how will the super-additionality
concept benefit countries which do not have even basic infrastructure
where you can actually avoid carbon emissions growth? I am not
sure I quite see whether there is going to be any benefit for
Africa.
Ms Hampton: When I talk about
super-additionality, I talk about it in the context of the major
emerging economies. You would still need a project-based mechanism
for Africa particularly and even with that, you need a lot more
effort taken to improve the distribution of benefits there. A
lot more needs to be done, both in terms of assisting in capacity
building, around general investment environments but also climate
specific. The designated national authorities for instance are
very poorly resourced in Africa. The local business communities
are not as well educated about CDM as they are in China, so they
might not be identifying opportunities that exist. The nature
of the projects also in Africa is different; they do not have
large chemical plant in sub-Saharan Africa so they cannot benefit
from the industrial gases. What can they benefit from? Well they
can benefit from energy efficiency certainly, from some kind of
fuel switching, from agro-forestry and those kinds of assets are
the sorts of things that are going to start happening now the
cheaper larger abundant reductions are being used up. We are going
to start to move to a place where the costs of carbon are more
attractive to do investments in Africa and that is starting now.
If an African country wanted to do a sectoral mechanism, then
they should not be stopped, they should be encouraged, but for
now, given the capacity to gather data and enforce and so on,
it is more likely that Africa will continue to work in the area
of project-based CDM, at least for the coming years.
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