Examination of Witnesses (Questions 80
- 85)
TUESDAY 26 JUNE 2007
PROFESSOR DIETER
HELM, CBE
Q80 Mr Hurd: Can I move on to Treasury.
This Committee has published a number of reports critical of the
Treasury in terms of its engagement with climate change. Do you
think that is fair?
Professor Helm: I put the question
the other way round: why should it be the Treasury's function
to pursue this activity? The answer to that question is that they
have taken an extremely narrow view about the remit of taxation
charges, "polluter pays" charges and so on, and held
those within their own domain and then exerted control from that
direction. The role of Treasury depends on whether you are prepared
to entertain hypothecated instruments in the environmental area,
hypothecated taxes and so on. If they are hypothecated and therefore
revenue-neutral from the point of view of general public expenditure,
it seems to me that those instruments should not be set by the
Treasury but set by the relevant departments covering those policy
areas. That is a difference from a world where you are thinking
of general carbon tax or general petrol taxes, where they are
part of the general revenue of the Exchequer. That comes back
to broader issues where you think that Treasury should be some
giant ministry of finance and ministry of economic affairs, essentially
the ministry for the economy and all its activities, centralised
in one department, or whether you think the Treasury department
should be a kind of Gladstonian institution that is concerned
with the overall budget of government and government's finances.
I happen to fall into the latter category.
Q81 Mr Hurd: The current document
believes in the former and the question of lack of willingness
to engage with new fiscal instruments, for example driving through
consumer inertia in relation to energy efficiency in the home.
Professor Helm: I have been on
several committees where hours have been spent debating whether
something is technically called a tax or a charge, and as to whether
or not it could be decided outside the Treasury. This has been
going on for 25 or 30 years. You can understand the legitimate
concerns of any Treasury losing control of financial instruments.
On the other hand, if we have a general idea that the polluter
should pay, that charges represent the environmental damage caused,
and that those revenues should be properly used for rectifying
those purposes—think about it more like the Home Office
thinking about prison sentences and penalties. This is something
that the environmental department could and should do. As a factual
matter, there is no doubt whatsoever that one of the core reasons
why we have failed so lamentably to develop economic instruments,
market-based instruments in this country, to tackle environmental
problems, has been the reluctance of the Treasury to entertain
these possibilities.
Q82 Mr Hurd: How do you explain that
reluctance on the part of the Treasury?
Professor Helm: I am not so sure
I have such inside knowledge! I think there is a great concern
amongst some aspects of the economy and some representatives of
the economy that making polluters pay for the consequences of
their action will reduce the competitiveness of certain sectors
of the economy. The classic example is this: why is there no pesticides,
nitrates and herbicides tax in this country? Why has it taken
so long to put those into place? The answer is not that no-one
has ever come up with any good economic reason why it should not
be done and that there is no reason why the polluters should not
have to contribute towards the pollution they cause; it is that
the farmers have complained it would damage their competitive
position. The question at the end of it is: how far does the environment
count against what is normally deemed a core economic activity?
So far, the Treasury has, for understandable reasons, tended to
be sceptical about the extent to which the environment should
play this over-arching importance in policy—and that reflects
an even deeper point. The thinking about economic policy, market
power, competition and monopoly has been to treat them as if they
are almost the only market failures, whereas, repeating my earlier
point, there is nothing in any economics textbook that says externality
is any less serious than a monopoly market failure. That is what
we are missing in policy more generally.
Q83 Mr Hurd: Can I ask more questions
on the area of bringing on technology. You have argued consistently
that it is not the role of Government, that they should step back
and simply determine outcomes and create the concept of carbon
contract. How do we marry that with the argument for the need
for government intervention to enable early-stage technologies
to get to the stage where they could compete in the kind of processes
that you imagine?
Professor Helm: I have always
made the distinction between a carbon policy aimed at signalling
to the market the possible pollution that takes place and establishing
the long-term price of carbon, and a technology policy, an R&D
policy aimed at stimulating new technologies and research et
cetera. I have never denied that we need the latter, but I
think it is very important that in thinking about climate change
we do not muddle them up. In the climate change area there are
problems about technologies that are long-term—not knowing
what the price of carbon is going to be, with nuclear power as
one of them, but tidal and lots of other technologies: we just
do not know what the benefit of being low carbon will be. Separate
from that, there is a host of problems in the economy concerned
with the sunk costs of R&D research and how to do that. I
would like us to think about the research issues as part of a
joined-up R&D policy. It is absolutely right in R&D policy
that you do have to allocate monies to different ideas. That is
not picking winners in the market; it is going through a process
of allocating research monies. We have a whole set of institutions
designed to do that, for better or worse, and it is a long subject
about how those could be re-formed. In the climate change area
people say, "I know that this technology is better than that
technology", and rather than have an instrument that is designed
to price for carbon, I will peg that technology. The worst possible
example is a proposal in the Energy White Paper, not only to pick
what is a renewable and what is not, but for the Government to
go through and allocate weights to each of the different technologies
within the Renewables Obligation. I want a broad low-carbon option;
the Government wants to go extremely narrow. If you want an example
of the best way to design a policy to maximise lobbying capture
and the distortion of outcomes, when the Government has its hands
on the precise weight of the subsidy to go to particular technologies
I assure you that the PR industry sees a very large party coming
their way.
Q84 Colin Challen: Do you think that
the proposed composition of the Climate Change Committee is the
right one? It seems to me that it is likely to be stuffed full
of economists who might be very robust, if that is possible with
economists on economic issues, but not so much in terms of science.
How much can you rely on the current proposals to deliver robust
science-based economics?
Professor Helm: The first thing
to say is that it is to be welcomed that at least the Government
is specifying the areas of expertise it is interested in, rather
than stakeholders or lobbying groups that it would like to see
represented. Having a view about what kind of expertise one might
want is a good thing. The second thing to say is that it probably
matters less whether someone is called a scientist or an economist,
and it matters more what kind of scientist or economist they are.
I was very struck, when on the Council for Science and Technology
for three years, that in principle one had lots of different expertise
represented in different disciplines around the table; but, actually,
it was the sort of person in each area that produced the kind
of consensus around the table. On the issue between economists
and scientists, of course science should be properly represented,
but ask yourselves what it is you want the committee to do. If
you want it to advise the Secretary of State how, in the light
of scientific evidence, he or she should readdress the targets
they have set and revise them, then that is the expertise you
want. If you are asking the question what would be the impact
in the next five years of the first five-year carbon budget on
the economy—can it be achieved—what will be the price
effects—it seems to me you would probably need an economist
to address that question. I am very relaxed about the precise
ratio of these things, but you want good scientists, good economists
and good people from the business sectors too.
Q85 Colin Challen: The Committee
has been asked to report to Parliament on an annual basis and
to provide advice to Government. Is there any conflict there?
Has it got to come back to Parliament each year and say how the
Government has failed to listen to its advice? The credibility
of the whole Committee might then begin to suffer if each year
it has not got a good story to tell because it will reflect on
its own authority if the Government does not heed its advice?
Professor Helm: My personal view
is that what is being set up here is what might be called metaphorically
a train crash. Basically, in the current climate there may well
be a competition to set the toughest first three five-year rolling
carbon budgets. It seems to me highly likely in the first and
second of those periods that the actual performance of the economy
on climate change might be very poor. After all, we have not even
stabilised emissions yet, and if emissions fall slightly this
year it is to do with the complexity of the trade-off between
gas prices and coal prices. The fundamentals are that the economy
has not even stabilised emissions, doing worse since 1997 than
the American economy. If this Committee recommends, on the basis
of scientific expertise and other expertise, that quite tough
budgets will have to be set to achieve the targets, and if it
turns out we have to run the coal stations to keep the lights
on, to give an illustration, quite early on the Committee will
find itself in a position of reporting to Parliament that we are
missing the targets, even in the early days. The question is,
who recommends what happens then? Does the Committee say to Parliament,
"By the way, not only are we missing these targets, but these
short-term targets require quite draconian action now to get us
back on course, and we recommend that the Government should change
tack and do these things"? That is when you bring up really
sharply what political decisions are to be made about the trade-off
of overall objectives as against the advisory job of this Committee
to illustrate the position that the Government is in and the sorts
of measures that might be taken. In a way, what is being set up
here is a situation in which the Government adopts these quite
demanding budgets, and then it sets up an institution to rub its
face in it when it does not achieve them fairly early on in the
day, for the very good reason that there is not much going on
in the British economy that is going to turn around the emissions
position in the next five to ten years in this country. The energy
efficiency stuff will take time to get going. The renewables progress
is pretty limited by planning. Air conditioning markets will come
into play. There are pressures to increase energy demand. The
nuclear power stations may well go off early and the coal stations
will become vital to that process. That is a pretty difficult
context. Fortunately, I am not a politician and do not have to
think through how I would get myself out of the mess which will
have been created out of this process for those politicians not
far into the future.
Chairman: On that rather cautionary note,
Dieter, thank you very much for coming. It has been a very interesting
session and we appreciate the time you have taken.
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