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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 460-iii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENTAL AUDIT COMMITTEE
FORECASTING, COST-EFFECTIVENESS AND CLIMATE CHANGE
Tuesday 1 May 2007 MS KATE HAMPTON and DR TONY WHITE MR MIKE PARKER and DR JOHN RHYS Evidence heard in Public Questions 179-242
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Tuesday 1 May 2007 Members present Mr Tim Yeo, in the Chair Mr Martin Caton Colin Challen Mr David Chaytor Mark Lazarowicz Dr Desmond Turner ________________ Memorandum submitted by Climate Change Capital
Examination of Witnesses Witnesses: Ms Kate Hampton and Dr Tony White, Climate Change Capital, gave evidence. 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 the Government 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 2009-2010 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 Tokyo 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 per cent 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 a way of 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 per cent 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 pre-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. Q200 Colin Challen: The Bill contains a section at the end which deals with the potential to introduce new emissions trading mechanisms, which you have described as a revolutionary new approach, even though it is only enabling the revolution at this stage. What do you see as the great features of that in the Bill? Why do you welcome it so much? Dr White: Things can happen a little bit faster and it is only possible because there is cross-party support for the climate change issue; the fact that it could be faster. It is not completely wide-ranging, it is only trading mechanisms and that is a good way to start to see how much more discretion can be given in this area to accelerate the way in which we reduce emissions. Q201 Colin Challen: Perhaps the reason why we do not have the fully-fledged version in the Bill is because you do not think the political realities as they are at the moment will support anything more radical. Dr White: I am not sure we know enough at the moment to do it more radically at this stage. We do not know enough now. Could we have a domestic cap and trade scheme put in now? Could we do it? We do not know enough. Q202 Colin Challen: How do you think these enabling measures will survive the scrutiny process? Dr White: Well all I will say is that I am not an MP and I would ask you that. How do you think it will get through? There would have to be a certain number of safeguards that would have to be offered about the kind of timing, the ability to discuss, but, to be honest, I was just interested in the fact that this is something that can make new legislation come through maybe a bit faster, where there is consensus on the agreement that actually something needs to be done in this area. Q203 Colin Challen: Which you do not really see as being there at the moment in society, not necessarily just between the political parties. Dr White: In the last six months we have seen a big change in society actually in terms of what society is willing to do. I just heard the other day that when B&Q put its wind turbines up for sale, they had nine million hits on their website. Centrica sent a survey to all of its customers and got a 15 per cent return; people had to answer 17 questions and they sent it back. This would not have happened two years ago. There is definitely a sea change. Ms Hampton: The point about leadership is key. Experiment and leadership have to occur in the places where there is a societal willingness to do that and if not the UK, then who is going to test out these mechanisms. Frankly, there is the broad political support, there is support from business and if the UK does not do it, then I cannot see many other countries stepping into the fray. There are other countries that will move quickly, if it is a success in the UK, places like Germany and others, but the UK is really where the leadership challenge lies. It is no longer about saying we will reduce X per cent in 2050: it is about actually planning a route to get there. We are only just off the starting blocks really in terms of leadership and this is a real opportunity to show that. Q204 Colin Challen: Do you think we should do more to streamline the system? We have so many different schemes in operation and the enabling powers anticipate perhaps more schemes being introduced. Would it not be far better for the investment community if they could just have a very much more streamlined system that does not add all these bureaucratic complications and confusion in the market? Dr White: In the heart you obviously say yes, but the problem with that is that certain mechanisms will work in some markets but not in other markets. Some places are expected to regulate non-compliance and the like and in other places a trading scheme could work. What would be interesting is that the Committee establishes what kind of price of carbon is embedded in the various measures that are adopted. If you look at the renewable obligation, in carbon terms it is really quite expensive. If you look at bio-fuels, it would be the same as well. Okay, there are other reasons why we would want to do it, security of supply reasons, but for the carbon element, we should try and go to some embedded price that goes across the whole economy, building standards, that kind of thing. Q205 Colin Challen: The potential for introducing personal carbon allowances, which this Bill certainly paves the way for, does raise the question of whether the burden should be dealt with downstream with the consumer or upstream, as much of it is at the moment, with power generators and cement manufacturers and other major industrials. Do you think there is going to be a danger there of duplication? How is that going to be sorted out if we start asking the consumer to trade carbon? When you buy electricity for example, who pays? Dr White: There is a real case there that just the administrative costs of doing something like that would be really quite high in my view. What I am hoping is that we are going to move to a different model of energy supply. What I have always thought should be happening is that instead of the people just generating electricity and selling gas and customers just using it, we change that business model. The kind of way I see it changing is instead of selling energy, et cetera, you would be selling lighting and comfort and warmth. In which case, if you could do that, then the energy companies would have an incentive to invest in their customers' facilities such that they could still make more profit despite selling fewer units of energy. To me that is absolutely key. The way that works - and you do not have to look that far back - is that when Edison started in the nineteenth century, he did not sell electricity, he sold lighting. He gave light bulbs to his customers and charged them according to the number of light bulbs. When that was happening it was in his interests to generate his electricity as efficiently as possible and make his light bulbs as efficient as possible. Once it changed so he was then selling units of electricity, the whole business model changed and he wanted to sell as many light bulbs which were as inefficient as possible and the model falls down. If we can move to a position where the energy companies, instead of building their next power station or developing their next gas field or getting another cargo in of LNG, actually invest in giving someone a new boiler before it needs replacing and it is a much more efficient one, maybe installing solar panels, maybe doing solar/thermal or wind turbines or what have you such that they can make a return on the investment in their customer's location, rather than a return on the bit of kit they built somewhere else, that, to my mind, is probably a more effective way. The companies themselves would still be penalised according to the amount of carbon that they emit at their manufacturing place. Ms Hampton: Energy efficiency and energy demand are the issues that we really have not dealt with effectively, not just in the UK but everywhere and yet everybody says it is the most important wedge, it is the easiest thing to do for climate. However, without trading mechanisms in some of the consuming sectors, it is quite difficult to see how you would incentivise the companies that can provide the services that do that for people to make a buck. Without those incentives it is quite difficult to see how we will get that energy efficiency because even if economically it makes sense, commercially there is nobody interested in it. Dr White: You could move to personal carbon allowances, but that would be a very, very difficult thing to do. In the meantime there are lots of other things we could do as I have just described which would get us an awful long way down the road. Q206 Mr Caton: Could we move on to the economic impacts of mitigation? Stern said that even limiting the total cost of mitigation to one per cent of GDP by 2050 will mean price rises and economic upheavals in the meantime. That message has not been perhaps as widely disseminated as some of the other messages that came out of Stern. Are we being honest enough about the fact that there will be economic losers as well as winners in carbon mitigation? Ms Hampton: We are not necessarily being honest enough, but the important thing is, coming back to the point that Tony was making about services, that it is not about having energy at the lowest cost, it is about having energy at the right price and the services that come from paying the right price for energy. If you have a rounded debate, traditionally because the green movement has been under attack from all sides, particularly when it comes to the economic cost of doing things, it has tended to be too defensive and now we are entering into a phase where we can have a much more informed debate about what the right price for energy is and how that encourages people to think about services rather than just energy. Then of course there will be some sectors of society that will suffer as a consequence, but that should be dealt with through social policy not through climate change policy. Dr White: I remember the quotation, but Stern's major point was that we do not really have a choice. If we do not do anything, it is more expensive than doing something and yes, there will be those upheavals. My view has always been that, first of all, we have had a massive carbon tax in the last few years where the price of oil went from $20 up to $70 dollars a barrel, but we have managed to keep going. What Government can do though is effectively give long enough price signals or frameworks so that people can invest to mitigate the costs of mitigating carbon dioxide as best as possible. Given that we would not choose to have a world that suffers from excess carbon dioxide, we are getting that way, therefore what is the most effective way of tackling it, so that life can go on? Q207 Mr Caton: The Regulatory Impact Assessment with the draft bill says that the carbon intensive sectors of the economy are likely to contract. Does that mean we are going to lose manufacturing jobs? Ms Hampton: This has been looked at a lot in the context of the EU high level group on competitiveness, energy and environment that I have been involved in and a lot of that industrial restructuring is occurring for reasons other than climate policy. There are a few sectors which are particularly vulnerable to carbon pricing: aluminium is one; cement plants, but only on the edges of Europe. So in the south of Spain, where they could move to North Africa for instance, they are vulnerable but not cement as a whole. It is a very complex picture. In addition to that, a lot of our efforts will benefit from the scale associated with clean technologies being deployed in China for instance: very large market; can deploy at scale; could do PV cells probably cheaper than we could. It goes both ways: there are benefits and costs and, again, it is an issue of making sure that any adjustment process that is necessary or is likely to happen anyway is mitigated within the context of the appropriate policy. If you have a global system where the energy intensive sectors, for instance, will be the target of sectoral mechanisms - this is the discussion that is happening in the business community around competitiveness at the moment - if there are sectoral benchmarks which apply globally and you only benefit from carbon finance, if you overachieve that is going to start mitigating some of those impacts. So again, if you design the international regime to take account of those things, then those risks will be somewhat smaller. It is very easy to lay industrial restructuring at the door of climate policy when actually it is the effects of exchange rates and labour costs and raw materials and transportation which are actually much more significant except for some particular sectors. Q208 Mr Caton: Is there anything we should be doing in those sectors, to try to protect those industries, or is there anything we can do? Ms Hampton: The key thing is to make sure that action on climate change is occurring with as much of a level playing field globally as possible. That is probably the best protection that companies get to compete in a fair international environment and by engaging major developing economies such as China and India, through carbon finance and assisting them in transforming their energy-intensive sectors, we will be levelling the playing fields. Understanding the international negotiation dynamics associated with carbon finance will support our industry not just the international climate change effort. So far, because the EU has been alone in what it has been doing, it has been very easy to challenge it on competitiveness grounds; as the efforts become more widespread, then there will be more room for levelling the playing fields. Q209 Chairman: Is there anything else that we have not talked about which you think is relevant to what we are trying to do? Ms Hampton: Transparency is key. In how this Committee operates, what advice it provides and how the decision-making process occurs, transparency is absolutely essential and that will give confidence to the market. Chairman: Several of us are serving on the pre-legislation scrutiny committee as well, so there is an overlap between the EAC and that and I hope we shall be exploring exactly that point in due course. Thank you very much for coming in again; it is much appreciated on our part. Witness: Professor Paul Ekins, Head of Environmental Group, Policy Studies Institute, gave evidence. Q210 Chairman: Welcome back. It is very good of you to come to talk to us again. I wonder perhaps whether you might start by giving your overall reaction to the draft Climate Change Bill, whether you think it is ambitious enough in its scope and so on. Professor Ekins: It is potentially an historic bill. It does not of course do much in itself to reduce carbon emissions; there are no policies in there. What it does is establish the statutory obligation to reduce those emissions and provide the various mechanisms whereby that obligation can be properly monitored. What that might do is take the climate change issue beyond the normal football field of political debate to a higher level football field of political debate in the sense that all parties in Parliament will need, if they disagree with carbon-reducing policies, to propose other carbon-reducing policies in their place. The option of simply saying "We don't want to reduce carbon", unless you are going to repeal that Bill, will not exist and that is potentially a very, very important development. Q211 Chairman: Were there any omissions, things you would have liked to have seen in the Bill that are not there? Professor Ekins: There are perhaps two areas: one is the scale of the reporting. At the moment, the scale of the reporting is rather limited to Parliament and it would be missing a trick if the whole issue of public awareness was not included in that scale of reporting. That seems to me to be the really key area. Q212 Chairman: I am going to divert for a moment, because it is the first time we have talked to you since the Stern review was published. What was your general view of Stern? Professor Ekins: It did an enormous service to everybody by framing the economic issues in a way that they are often not framed. I was very impressed by the way in which firstly he starts with the science and the concerns of scientists with potentially catastrophic impact. That is why we are worried about climate change, because of potentially catastrophic impacts. If it were everything just getting gradually warmer, over two degrees in 50 years, that would not be the issue. It is the potentially catastrophic impact. I have seen so many economic analyses that simply do not recognise that point and yet that is the point that is driving the political concern and that is concerning the scientists. Chapter two of the Stern report is about the ethics of climate change which again you often find is not very well mentioned in economic analyses: the fact that there will be losers and the fact that the losers are likely to be the poorest people on the planet, whereas the people who will have benefited from the activities that cause climate change are the richest people on the planet. This is a fundamental ethical issue which needs to be factored into the way in which you think about the costs of climate change. Of course Stern then does that by coming up with this range of GDP costs from damage of five to 20 per cent whereby that 20 per cent is supposed to capture some of the catastrophic impact issues and the fact that there are ethical issues and there are weightings to be applied to take account of those ethical issues. Of course, those numbers in my view are largely picked out of the air because we do not even know what all the potential outcomes are from climate change; we are much less able to put an economic cost on them. It was one of the first serious economic studies that I saw that gave what I considered to be adequate weight to those key issues and then evaluated the economics in the light of those key issues. Q213 Chairman: Well that is a pretty favourable verdict, which I incidentally entirely share, though I am much less expert on it. Do you think, in the light of that, that Government's response so far has really been adequate? Professor Ekins: No is my honest answer to that. I find it hard really to explain to myself why, for example, the Treasury, which commissioned the report from its Chief Economist, has had two signal opportunities since the publication of that report, both the Pre-Budget Report, when the Stern review was published, and indeed the Budget in 2007, to show the world just how seriously it was taking it. While some welcome measures were announced in both reports, to someone who is an avid follower of both Pre-Budget Reports and Budgets, they were much more a continuation of business-as-usual, rather than something that said "Hang on boys, we've had a wake-up call, we've pedalled the wake-up call round the world where it has had a huge, completely unprecedented impact and we are going to show that we are taking it seriously at home". I am not a politician, but I kind of feel that the public would have resonated to something much more ambitious at that time and the fact that it was not forthcoming was a great opportunity lost. Q214 Colin Challen: The Stern report suggested that the developed world should take emissions cuts of between 60 and 80 per cent and the Government defended their decision to put in the Bill a 60 per cent target on the grounds that falls within the range suggested by Stern. What do you make of that? Professor Ekins: It is obviously at the bottom end of the range and the science of the last few years has increasingly shown that 60 per cent is very much at the bottom end of the range, if we want to avoid dangerous anthropogenic climate change. The Bill of course does allow targets to be changed in the light of scientific experience and it may be that it will be easier to get the Bill into statute at the 60 per cent level and then increase the target, if that seems to be even more justified by the science than it currently is. It may be that it will be easier to do it like that than to put an 80 per cent target in from the beginning. Q215 Colin Challen: Do you think it might be easier perhaps not to have a stated figure as the target but to have the transparent formula on which it is based in the Bill so that you do not have to wait for a significant change and what the significant change in the science is that will change the target is not defined? Do you think it would be better to have a formula in the Bill so that it could change as and when required? Professor Ekins: Of course there are lots of uncertainties in the science and there are going to be lots of uncertainties in the science and it is highly desirable that there is an actual target in the Bill so that the people who are investing in low carbon technologies know what they are aiming for in terms of carbon emissions. You will remember that the 60 per cent comes from the energy report of the Royal Commission on Environmental Pollution published in 2000. I am currently a member of that body and our view probably is that the science has changed and that if we were writing the report now, we would be thinking quite hard as to whether the target should be higher. We have not had that discussion, so in a sense I am speaking a bit out of turn, but that certainly is an issue. Our thinking behind that was to keep the atmospheric concentrations at 550 in order to keep the temperature increase to below two degrees centigrade above pre-industrial levels. Now, my understanding of the science is that it may well be that 550 will not do that any more and it is clearly the average temperature increase and everything that flows from that that is the key effect. It might be as well to put in the Bill something like "This is the objective of this 60 per cent target" and if the science suggests that actually 550 is not low enough and that that therefore means the two degrees will be significantly exceeded, then Government have a statutory obligation to revisit that target in order to think about emissions trajectories that are more likely to keep the effects in check. Q216 Colin Challen: I take your point about political expediency, although I understand that the Conservatives have argued for a higher target, 80 percent I think. Do you not think that allowing the political expediency to have such an influence on the Bill and this target-setting process perhaps fatally flaws the Bill in terms of the science and what the Government's stated objective is, which is to keep the temperature increase within two degrees rise? Professor Ekins: Firstly, the science is a little uncertain and therefore the 60 per cent is within the relevant range albeit right at the bottom of it, but the Bill is not fatally flawed because the target can be changed and it explicitly can be changed within the Bill should the political consensus around that be established. To be honest, from this perspective in 2007, whether it is 60 of 80 per cent is much less important than establishing a credible interim target which will start us reducing carbon emissions rather than increasing them from now. That seems to me to be the really key issue which we ought to be focusing on. Once we have started that process and people have started to make money out of low carbon technologies and people have managed to adjust their lifestyles so that they make less use of carbon in their lifestyles, then we will be in a much better position to start thinking about adjusting the targets downwards, if the science seems to suggest that. Right at the beginning of this process, 60 per cent is a pretty reasonable shot to be aiming at and it is pretty ambitious. Q217 Colin Challen: Do you think that that figure should include offsetting, buying our way out through offsetting elsewhere in the world? Should that not be an additional part to it? If we agree that 60 per cent is already a low level of achievement and you can lower it even further domestically by buying credits from elsewhere, do you think that is really morally correct or indeed sustainable in any other respect? Professor Ekins: That is a very problematic issue. We can understand how this offsetting business got into Kyoto and everything, a quite justifiable desire to reduce the costs, but what is becoming apparent to me is that despite the best efforts to make CDM et cetera rigorous and robust and to result in real carbon reductions, there are always carbon reductions against a hypothetical baseline and just the fact that you do a carbon reducing project that produces fewer emissions here than would otherwise have been emitted does not mean that the capital is not going to go off somewhere else and reduce carbon emissions somewhere else. There is a real danger with these offsetting mechanisms that we could find ourselves in a position where all countries look round and say "Well, we're reducing emissions very well because we're buying all these offsets and stuff" but globally emissions keep rising. That is a real danger, which is a long way of saying that the offsetting mechanism needs to be very, very sparingly employed in developed countries' targets and the great majority of them should be through domestic action, so that a rich economy like ours can show that it is possible to maintain civilised life and have low carbon emissions which, at the moment, is the hypothesis that needs to be proved. We do not need to prove that. If you change a very inefficient coal-fired power station to a less inefficient coal-fired power station, you produce fewer emissions. That is something we know. What we know we have to find is the way of living civilised lives with low carbon emissions and that should be the objective that is pursued by the Bill. Q218 Colin Challen: Last week we heard from the RSPB and WWF that they thought we should have a higher target and they were talking about 80 per cent and that would more accurately reflect our responsibility as a developed nation but would also help drive investment in low carbon technologies elsewhere in the developing world. What would you say to that argument that we do need to have a higher target, if we are really serious about driving that kind of development elsewhere? Professor Ekins: At the risk of repeating myself, a 60 per cent is pretty tight. If people thought we were serious about hitting a 60 per cent target, and at the moment we have had targets that we were not serious about hitting and therefore we have not hit them, if people thought we were serious about it then 60 per cent would drive it. Eighty per cent would probably drive it more. The only difficulty with 80 per cent is that in my view you would need to bring the interim targets up to make it a credible trajectory and at that point you are starting really to push the policy envelope as to what is politically feasible. Again, I am not a politician. If Parliament were to decide that 80 per cent was the right way to go, then that would be absolutely splendid. Q219 Colin Challen: It is this trajectory issue which is of crucial importance. If we do delay making a change to what we already accept as being a low target, at the bottom end of expectations, and which I personally believe the science no longer supports as sustainable, if we change it in five years' time, that means we have five years fewer to achieve a higher target, so for a whole variety of reasons it would seem to be imperative that we get it right from the start. If we do make that change later on, how do you think we could make the transition? How could we change the trajectory? Professor Ekins: One of the aspects of Stern with which I am in most agreement is his insistence that we have to start now and that if we delay, it will end up more expensive. Of course, if we delay and we have to hit a higher target, then it will end up more expensive still. You and I are definitely at one on the need for immediate urgent action and that, to me, was the one headline message of Stern that I would want to take home. Q220 Dr Turner: Surely the 60 per cent target only means anything in terms of world total CO2 emissions. Then, by definition, some countries are going to have to achieve more than 60 per cent if the world is going to achieve 60 per cent and the onus clearly has to be on the large-scale industrial emitters such as ourselves. So there is a very practical reason for wanting a higher target for the UK than 60 per cent. Would you agree? Professor Ekins: My sense is that the 60 per cent target is a target for the UK which is consistent with a global emissions trajectory that will not breach these concentrations, but it is not calling for a 60 per cent reduction in global emissions from a 1990 base. The calculation is based on the perception that if developed countries were to reduce by 60 per cent and developing countries were to increase their emissions but by less than is currently forecast, then we would get on this trajectory but that 60 per cent is not intended to be a global emissions target. If it were, then you are absolutely right that developed countries would have to reduce their emissions by much more than 60 per cent to allow for the inevitable emissions' growth in developing countries which we can see taking place every day. Q221 Dr Turner: CO2 emissions do not recognise national boundaries, do they? Professor Ekins: Indeed they do not. Q222 Mark Lazarowicz: We are still going to have the Committee on Climate Change and we have the Office of Climate Change and there are various other focuses for government activity such as the Interdepartmental Analysts Group. What do you think should be the respective roles and responsibilities of the committee, the office and these other agencies and committees and the like? Professor Ekins: The innovative aspect of the committee is that it is an independent body and it will therefore be able to draw its conclusions on the basis of best information from science, social science, and it will be able to make recommendations which have that kind of authority. I suppose the comparison that one hears most often in this context is the Monetary Policy Committee. There were lots of bodies in Treasury concerned with interest rates and monetary policy and there still are bodies in Treasury concerned with things like that, but making the Bank of England independent and setting up the Monetary Policy Committee in order to look at those issues independently was perceived to remove the political pressure to play with those instruments in a way that was socially undesirable and that has been broadly a successful experiment. The Committee on Climate Change will have a similar kind of role now. No-one is proposing and I certainly would not propose that the policy recommendations of the committee were mandatory for Government in the way that the Monetary Policy Committee recommendation on the interest rate is mandatory, it actually takes the decision, because the policies on climate change are much too far-reaching and because it is right that there should be political accountability for them. Therefore, you will still have both the Interdepartmental Analysts Group and the Office of Climate Change having to consider the Committee on Climate Change policy recommendations and having its own take and bringing in the politics, which is obviously an important set of issues and the Committee on Climate Change will not have those constraints. I can imagine that they will still have plenty of work to do, but one of their key tasks will be to evaluate the recommendations of the Committee on Climate Change and if they decide that they do not want to go along with those recommendations, then they will have to propose something else and that comes back to what I said right at the start about the importance of this Bill: they will not simply be able to say "No, I don't like that" because there will be a slug of carbon which these policies are scheduled to take out from emissions and they will have to find some other way of doing that. Q223 Mark Lazarowicz: The regulatory impact assessment of the Bill suggests that the Committee on Climate Change would need staffing numbers around 15 to 20 to support it in its work. Is that the kind of size of support that the committee would require to allow it to carry out its duties with sufficient independent expertise and with a budget, as suggested as a result would be in the region of £2 million for that kind of level of staffing? Professor Ekins: That level of staffing sounds fairly reasonable, provided they are high quality people who have the necessary technical expertise because a lot of this stuff is pretty technical. You need to have people who are on top of engineering technologies, on top of the science of climate change, on top of the various social sciences that are used to evaluate the policies. I am slightly worried that the budget would not be large enough to support the level of outside research that will be necessary to make the policy recommendations properly grounded. I am not expert in what Government spends on external research, but it would be very interesting for example to see how much it had spent on external support for the Energy White Paper process that has been going on now for a couple of years and to see whether that was in any way perceived to be adequate and would cover the range of issues that the Committee on Climate Change would be expected to cover. Q224 Mark Lazarowicz: Do you have any thoughts on the kind of make-up of membership of the Committee on Climate Change and also as to how far Parliament should perhaps be involved in the selection of members or the scrutiny of the appointment process of members of the committee? Professor Ekins: One of the questions in the consultation paper is "Do I think it should be predominantly a technical committee?". My answer to that question is unequivocally yes. It needs to be very much an expert committee that is focused on the full range of issues that are relevant to climate change and, having said that, that means that it will need quite a range of technical expertise because there will be lots of social issues that it will need to consider, apart from fuel poverty, as well as the other kind of scientific and engineering and technology type issues which are also going to be absolutely critical. The previous evidence which I heard the end of, for example, commented on why everybody says energy efficiency is such a good thing, but it is so difficult to achieve the kinds of 20 per cent absolute reductions that everybody says exist in the energy efficiency field. I am convinced that is partly an economic issue that energy has been cheap and people are used to it being cheap and they take time to react, but it is also partly a social issue. It is partly to do with the structures of society that make energy invisible, that do not make it a matter for comment and discussion and how to change those kinds of social norms will be a very important set of issues around the kinds of recommendations that the Committee on Climate Change will make and that again comes back to this issue of reporting. If it just produces a dry technical report on emissions trajectories and the like, it has certainly to do that and it has to do that well. It also has to think more broadly and report more broadly about the kinds of lifestyles, ways of life, behaviours which are producing these emissions in the first place and give some support to the political measures that will then be necessary in order to start changing those things. Q225 Mark Lazarowicz: On that point, you made reference earlier on to the Monetary Policy Committee and drew a distinction as to how this committee, the Committee on Climate Change, would operate as compared to the MPC. Another body with whom you might want to draw comparisons might be the Sustainable Development Commission which was set up obviously at the start of the current Government, perhaps to have a kind of role which one might imagine the Committee on Climate Change has in terms of public engagement and so on. What lessons do you think we could draw from the experience of the degree to which the Sustainable Development Commission has been able to influence government policy? Professor Ekins: The key difference is that the Committee on Climate Change will be reporting against challenging targets that have to be met by statute. The Sustainable Development Commission has only ever been an advisory body. It has covered a very wide range of subjects, but there has been no obligation on anybody to take any notice of it apart from the usual kinds of political pressures and tensions that arise when an authoritative body writes reports of a certain kind. The fact that the Committee on Climate Change will be reporting on the way in which Government have met quite specific targets and will be proposing ways in which, if there has been a shortfall, and we must expect that for the first few years at least extra policies, perhaps politically unwelcome policies which will need to be taken into account such as energy taxation, will give it much more bite. Q226 Dr Turner: Stern was also greatly concerned about the social cost of carbon. There is some confusion about what Stern is actually saying because it is argued that Stern has endorsed a social cost of carbon which is three times higher than the main value of £70 a tonne of carbon that the Government currently refer to. We had a little difference with the Financial Secretary of the Treasury earlier because he asserts that Stern's value relates to global costs and is therefore inappropriate for the UK, but on the other hand the Government also recognise that the effects of a tonne of carbon are the same wherever it is emitted. What is your view on the social cost of carbon? Professor Ekins: How long do we have? This is, in my view, one of the most complicated subjects in the whole area of environmental valuation. You will know that Defra and the Treasury had a joint process and commissioned a couple of learned papers on the subject which are on Defra's website and the Treasury's website. I was a peer reviewer of those papers so I was quite closely involved in it and I tried really to understand what was going on. Eventually I came to the conclusion that the social cost of carbon is, from an economist's point of view, a very elegant concept and quite a useful theoretical concept because it stresses that whatever action one takes on climate change, it should, in some sense be proportional to the sorts of damages that you are seeking to avoid. However, I came to the conclusion that all attempts to put a number, actually to arrive at a figure within which you could locate the social costs of carbon, were so fraught and uncertain as to be effectively useless as an instrument of policy. The main scientific report that the Treasury commissioned said that the social cost of carbon, looking at the literature, could be anything between £1 per tonne and £1,000 per tonne and accepted that even that was not a maximum cost. Anything that varies by three orders of magnitude and has a level of uncertainty of that level seems to me to be of little use as a policy check. Where are we going against this? There are lots of technical reasons why it is so uncertain, one of the most difficult of which is that of course you can only calculate the social cost of carbon once you have determined the carbon trajectory that you are on, because the cost of a tonne of carbon emitted today, which is what the social cost of carbon purports to be, the damage cost, the damage that that tonne of carbon will cause, depends on how much carbon is emitted in the future. If this was the last tonne of carbon that we were emitting and we were somehow to cut to zero emissions of carbon dioxide hereafter, that tonne would contribute to ongoing climate change and it would have a positive cost, there would be a positive damage cost there. However, if that tonne were followed by N further gigatonnes in the future, then runaway climate change would take place and this tonne today would have a very different cost. That is why you are getting this magnitude of ten to three. You have to agree the trajectory of climate change before you can calculate the social cost of carbon. As we know, the trajectory of climate change is one of the most uncertain things in the lexicon, quite apart from what the effects of any given trajectory of climate change are likely to be. One goes off into the uncertainties of climate change, the possibilities of catastrophic effects, et cetera. I have come to the conclusion that it simply is not helpful to try to put a particular number on that rather elegant theoretical concept. Q227 Dr Turner: In a sense that is a view which was reflected last week by the Office of Climate Change which is giving us the government policy view on Stern and they were talking in terms of relating the social cost to the level of stabilisation in the atmosphere. Surely it can be an instrument of policy because, if we push the cost of carbon to business up sufficiently then it will drive business in a low carbon direction. Do you not think that there is a value in putting numbers on it and that we can use these numbers to change practice in business? Professor Ekins: This is one of the major confusions around this whole social cost of carbon issue and it is a confusion which is present, I am afraid, in the Stern report as well and is certainly present in the two papers that were commissioned by Defra and the Treasury because that was one of my main criticisms. The social cost of carbon is a damage cost. It is the cost of a tonne of carbon emitted today in terms of the damage, climate change damages that it causes. The cost that you have just referred to is the mitigation or abatement cost, the cost that firms and people have to undertake in order to emit less carbon. These two concepts are totally distinct. They are quite different concepts economically. The ideal, in economic terms, is to equate them in such a way that the social cost of carbon is equal to the marginal abatement costs because you then arrive at this optimal state. Because you would like them to be equal in an optimal state, because the social cost of carbon is so difficult to calculate in itself, you get assumptions that the marginal abatement cost on what Stern calls a sensible trajectory will be roughly the same as the social cost of carbon. However, the whole point of thinking about the social cost of carbon is to allow you to determine what a sensible trajectory of carbon emissions might be. You have a real circularity of argument there which does not help. In my view, it is very important to think in terms of abatement costs because abatement costs are real resources which are committed in order to reduce carbon emissions and we want to keep abatement costs to a minimum through sensible policy and we want to take the low-hanging fruit first and we want to stimulate innovation and technological change, so that abatement costs come down. None of that has anything at all to do with the social cost of carbon, except that in so far as you are successful with your abatement policy and you reduce carbon emissions, that will reduce the social cost of carbon because you will move to a lower trajectory of carbon emissions, you will cause less damage out in the future and that will result in a lower social cost of carbon, but, as I have said, I do not believe that you can meaningfully calculate it. Chairman: That is a helpful distinction. Q228 Mr Chaytor: May I ask about the concepts of banking and borrowing? Is this a helpful provision in the Bill and does it really make any difference? Would it not happen anyway? Professor Ekins: It is absolutely critical that banking at least is allowed. Banking and borrowing are rather different in this field. Banking is critically important in order to give confidence in the carbon market, so that people will reduce emissions now, they will take early action, they will go for it right up to the limit of economic feasibility or economic viability, in the knowledge that if they save more carbon than they think they are going to, they will be able to offset those emissions against these very tough targets that are coming in the future. That is a very, very important incentive. Borrowing is much more difficult because we know that the natural instinct of practically everybody is going to say "Let's not do it today, let's do it tomorrow and then we can borrow against the future". Of course, if too many people borrow against the future, the future becomes unachievable. A very good example of that, in my view, was the way that the United States approached the Kyoto Protocol. All the analyses that I know suggest that if the United States started taking abatement action in 1997, the year that the Kyoto Protocol was signed, the costs of achieving its Kyoto Targets would have been of the kind that Stern suggests, perhaps one per cent of GDP or whatever. By waiting until 2004-2005, which is when a lot of the analyses started, obviously the cost of achieving those emission reductions once the emissions had grown enormously between 1997 and 2004 and you only had six years, all you could do would be to shut down a large part of the generating plant of the United States in order to achieve that, which of course is enormously costly. Had they been borrowing against that Kyoto Target from 1997, the target would simply have gone out of the window, as indeed it did because it was perceived to be too expensive. Banking is crucial and I would have 100 per cent banking for as long as people need to bank. Borrowing would need to be very, very restrictive, if indeed you allow it at all. To borrow, people would have to show that they have very, very good reasons for thinking that emissions in the future, which will be governed by lower targets, will enable them to pay back, will be low enough to enable them to pay back those borrowings. Q229 Mr Chaytor: Given the emphasis Stern places on early action, realistically are we going to be in a position to bank anything, given we do not have the policies yet in place to achieve the early cuts needed? Professor Ekins: If we were going to have very ambitious early targets, then we might not be in a place to bank, but it is nevertheless very important for that facility to exist because there will be some people who have overlooked very significant carbon reductions or there will be technological breakthroughs or innovations and I believe that those need to reap the carbon benefits of doing that so that people try harder to achieve them. Q230 Mr Chaytor: In terms of borrowing is the one per cent limit realistic? Professor Ekins: That should be an absolute maximum because one per cent of quite a large number is quite a large number. It is like being credit-worthy: you would really need to be able to persuade. Perhaps the committee would be a suitable scrutiny body in this respect and would reinforce the parallels with the Monetary Policy Committee. The committee would have to be persuaded that a borrowing today was really against the right kind of investment strategy that would allow those carbon reductions to be made in the future in addition to the carbon reductions which a reducing target is going to imply anyway. Q231 Mr Chaytor: Earlier, you talked about the importance of parliamentary accountability. Do you think the banking and borrowing provisions should be subject to parliamentary approval and not just the approval of the committee? The analogy with the MPC being that every year we have a Finance Bill. Professor Ekins: Yes, that seems to me almost to be a relatively technical matter. Once the Bill was passed and the banking and borrowing facilities were agreed and put into place with the necessary caveats, I would have thought that was something that the committee could take upon itself, obviously with Parliament's approval, because it is precisely that kind of issue which can play havoc with the politics and therefore it is a technical issue, it should be something that can be technically decided, perhaps like the interest rate and perhaps that could be a role for the Committee on Climate Change by itself. Q232 Mr Chaytor: Finally may I ask about the permissive powers for developing new trading schemes? Where do you think it would be most effective to introduce new emissions trading schemes, which sectors of the economy? Professor Ekins: The proposals that we have for the energy performance commitment which extend well into the business and public sectors what we have currently got from the EU emissions trading scheme and the proposals to include aviation and perhaps aluminium in that in the future, that is the low-hanging fruit as far as emissions trading schemes are concerned, in the sense that you are talking about significant organisations that will develop carbon management expertise. Once you are getting to much smaller organisations or even to individuals, individual motorists or individual householders at home when they are using their energy, then it becomes much more difficult, not just administratively, but in terms of understanding the market. Markets are complicated things and at the moment, there are lots of people who do not have a clue what carbon is or how it is emitted or anything. To create a trading scheme at that level is like creating a new kind of money: lots of people do not understand old kind of money terribly well and this is a new kind of money which would need its new smart card or whatever it was and people would need to understand all the ways in which carbon entered into their consumption. Ultimately that is very desirable. It is very desirable that we become carbon aware to that extent and so I see nothing wrong with it as a long-term objective. In the interim we would do much better to rely on the other economic instrument which is the price mechanism and I was a great supporter of fuel duty escalators, for example, because that transmitted a very clear signal year on year to motorists that petrol was going to be more expensive. Were one to introduce a trading scheme right upstream from the moment the carbon entered the economy, in other words the trading was essentially among the big energy utilities, then they would have to buy carbon permits and, especially if the permits were auctioned, which I would recommend, that price mechanism would then filter through. I am aware that the price mechanism is not a panacea and that not everybody takes notice of prices, especially energy prices which are historically very low. People are going to become more aware of energy prices; they are becoming more aware of them. They are going to become more aware of climate change and I suspect that that would certainly be an administratively much easier way of proceeding and would have a similar effect to introducing what would be quite a difficult scheme of personal carbon allowances or even bringing road transport in. I have been wondering, because it is the Government's proposal to bring road transport into the emissions trading scheme, who would have those permits. Would it be the individual drivers or would it be the oil companies that put the petrol on the forecourt? If it is the individual drivers, then it is an extraordinary innovation from the emissions trading scheme which will move from rather few very large organisations to millions of motorists. If it is the petrol companies upstream, then you are very much in the second model that I was talking about because they will have to buy the carbon and that will then be transmitted down through the price mechanism, so that is where the motorists will feel that carbon reduction mechanism. Q233 Mr Chaytor: When trading becomes deeply embedded into the structure of the economy, would there still be a future for the climate change levy or do you envisage trading taking over all of those functions? Professor Ekins: Interestingly, the European Commission organised a conference, Taxation on Sustainable Development, just recently in Brussels and they asked me to address that precise question, not in terms of the climate change levy, but in terms of energy taxation more widely; when trading becomes "it", do we need energy taxes? The first thing I would say is that if emissions permits were 100 per cent auctioned, then the answer is no, then we definitely do not need taxes. However, as we know, emission permits are not 100 per cent auctioned and it is likely to be some time before they are and the trading scheme is not universal and it is going to be some time before it is. Under those two circumstances, then energy taxation still has a very important role. One extra role that it has, quite apart from reaching parts of the energy-consuming system that the emissions trading scheme does not reach, is that it effectively puts a floor on the price of carbon and that is a very important issue for investors in low carbon technology. The price of carbon with the emissions trading scheme has been terribly volatile. It has gone all over the place between €3 and €30 a tonne over the last 18 months alone and we can expect it to be some time before it settles down because there are so many uncertainties, international uncertainties, national allocation plan uncertainties, as to what the amount of carbon available is going to be. If you were to have a credible minimum carbon tax, what that would do is put an effective price on the floor of the permits, because everyone would have to pay that amount for carbon, and then the price of the permits themselves would be reduced by that amount so the permits themselves would be cheaper and obviously if the carbon tax were set at the level of the permit price, then the permits would effectively be free, which is how they were handed to the companies in the first place, but they would all pay the tax and the people who had invested in low carbon technologies would get that minimum return based on the tax. There are lots of very interesting and quite technical issues to do with the interaction between taxation and trading, but until we get to the stage where all carbon consumers are covered by a trading scheme that is issued through a process of auction, then there is going to be scope for a tax. Q234 Colin Challen: Just looking at the pricing mechanism and concentrating on road transport, since the fuel protests in 2000 emissions from road transport have risen, despite the extra efficiencies in actual car efficiencies and so on and the price of fuel has also gone up well beyond where it was in 2000. How much do you have to add onto the price of something to make a deterrent or to reduce the use of that fuel? Professor Ekins: Firstly, I am not sure - I do not have the numbers in front of me, but one could obviously check this - that it is correct to say that the price of fuel is more now than it was in 2000 in real terms because although the price of oil has gone up substantially, that is a very small part of the price of fuel. It is only about 20 per cent of the price of fuel, the rest is tax and the tax has been largely frozen in real terms since 2000 so the tax effectively has fallen over that time. The price of fuel is probably rather lower at the pumps than it was at the time of the fuel duty protests. Working out the effectiveness of something like a tax like the fuel duty escalator is very difficult because you can only do it by saying "What would energy consumption have been, if the tax had not existed?". Then of course you get into economic modelling and economic models are notoriously difficult, they are complicated, they are difficult to understand, they may be wrong, they are uncertain, it is very hard to know what is going on. I think the ex post evaluation of the fuel duty escalator which the Treasury has done is pretty robust. It does show that the fuel duty escalator reduced fuel consumption substantially below what had been projected and I do remember that early in the 1990s, before the fuel duty escalator came in, when we were thinking about projections of emissions from road transport, they were projected to be very much higher by the end of the decade, that is by 2000, than they in fact turned out to be. Emissions from transport during the 1990s stayed largely constant. There were several factors that will have fed into that, but I believe the road fuel duty escalator was certainly one of them. Since 2000 emissions have grown from transport quite substantially and, again, I believe that the effective freezing of road fuel duty from that date certainly has had a role to play in that; again there will be other factors. While with all the usual caveats about this being uncertain territory because you are evaluating against a hypothetical baseline, the evidence we have about the effectiveness of the price mechanism in the transport sector is rather persuasive and economists are generally agreed that the long-term effect of a price signal, especially a consistent price signal, is much greater than a short-term effect because it influences people's purchase decisions, what kind of car they are going to buy as well as car makers' design decisions about how fuel efficient they are going to make their cars. I am generally persuaded about the effectiveness of prices, especially in the road transport sector, on the evidence that we have since the fuel duty escalator was introduced. Chairman: Thank you very much, that is very helpful indeed and comprehensive. We are grateful to you for coming in. Memoranda submitted by British Institute of Energy Economists Climate Change Working Group and Dr John Rhys
Examination of Witnesses Witnesses: Mr Mike Parker, Chair and Dr John Rhys, British Institute of Energy Economists Climate Change Working Group, gave evidence. Q235 Chairman: Good morning and welcome. You would have heard most of the previous exchanges; we will cover some of the same ground but not entirely. I wondered to begin with whether you would just like to take us through the main arguments of the Climate Change Group paper that you produced? Mr Parker: The starting point was that we were looking at the landscape outside and seeing that the scientific consensus was moving further and further towards being more certain of the scale of risks available in climate change and also we were very conscious of the fact that the underlying mechanism is one of cumulative irreversibility, if we do not do anything; every year which goes by that we do not do anything the problem becomes worse. So there is an inbuilt imperative to take the thing seriously in terms of urgency. The second was that if one then looked closer to home, we are absolutely convinced that the exemplary value of a strong policy within the UK is vital internationally as well as within the UK, that notwithstanding the fact that we are only two per cent of world emissions, our potential contribution to a sustainable world order on this matter is a good deal higher than two per cent; it is very high indeed, therefore that must be protected and nurtured. Yet one looks at the UK situation over the last ten years and we have not reduced CO2 at all, notwithstanding the enormous amount of work and analyses and energy reviews and so on and so forth that have taken place and notwithstanding the fact of the splendid work done by the Royal Commission. Here we have a situation where, some ten years after the Royal Commission did their number crunching in fact, there is now serious doubt as to whether the targets which they put forward of 60 per cent is in fact still valid because of the fact that we have made no progress over the last ten years. Those were our starting points. It seemed to us that there was a very good case indeed for examining the ways in which urgency as a particular factor can be incorporated in the conduct of policy, that ways in which we think about it all the time actually affect the way we do things. We have set out in our paper some of the things that one does not need, in view of the time, to go over in detail, but there are one or two things in particular we would want to emphasise and we did not know about the Climate Change Bill when we wrote this paper of course. The first essential precondition is that Government should appear to be single-minded in its pursuit of these very, very difficult demanding tasks. In other words, when they say it is the most important thing around, they should act as though it is the most important thing around. When one gets involved in discussions of this, people say "Ah, therefore you mean that energy security is not important". We do not mean that. "You mean that equitable distribution of fuel costs is not important". We do not believe that either. We did try to find a form of words, which we set out in paragraph 6(i) of our paper, where we said, in the context of joined-up government "Wherever possible, policies to meet other objectives (eg security, competitiveness and income distribution) should be consistent with and should not obstruct CO2 reduction" and that is the way round it should be done. That of course also helps you to look for synergies, look for countervailing measures which can be taken. The emphasis all of the time is whether public policy assists us to meet our carbon objective or not. We thought that was an important observation to make and it is of general application. Perhaps the most important thing is that we thought that having said all these things, one has really got to ask whether there is any particular way in which we could address these matters which would have the effect of addressing urgency directly, bearing in mind that everything takes a long time to do; not everything, but a great deal certainly of major technological change and system changes take a long time to do. If you look historically, people talk about 30, 40, 50 years in circumstances where there are enormous financial incentives to make these transitions. That is not so straightforward in this case. There is an enormous amount of inertia in the system whereby incremental changes introduced by the Government are swallowed up by underlying trends and so on. It did seem to us to be highly desirable to take this thing apart and think about it in terms of timescales, in terms of time all the time, how one can progress the momentum forward. We made this suggestion of a time-critical pathway to be developed by government departments for the three main sectors of electricity, transport and the building stock. There is a little bit of overlap between these three things, but they can nevertheless be reasonably well defined and talked about independently and the process here should be to think through very clearly and analytically how much more we can get out of incremental marginal improvements to existing capital stock and the existing systems and over what timescale that is likely to taper away and to what extent therefore is the timing of the need to be reliant upon new technologies and new systems. That is the first constituent part. The second is to look at all the options that are available to move in a low carbon direction at a reasonable pace thereafter and to see to what extent they have different lead times or different barriers to progress and the time it would take to remove those barriers and in this way to identify, using the analogy of the critical path which is used very usefully managerially to order the conduct of large projects, civil engineering projects, maybe the Olympic Games for all I know, so that you get to the end in time, to take that analogy and see whether it can be applied to the conduct of climate change policy and using the word time-critical to keep emphasising what the main constituent interest is and to get descriptions by Government for the three main sectors not only of what the main decisions, the key decisions are that have to be taken, the main things that have to be done and not only the order in which they all have to be done but also the timing of them, if we want to arrive where we want to arrive at. This brings out the other very desirable part of this way of thinking about things which is that working back from the answer is a very, very useful thing to do for this particular kind of problem which we have. It is an extremely long one. It embraces the timescale of many ministers and quite a few parliaments and that is one of the virtues of the draft Climate Change Bill, that it does look over a reasonable period of time in that respect. Working back from the answer is a very powerful way of concentrating minds as to what has to be done so we have the answer. In the case of electricity, for example, we have suggested that, bearing in mind the likelihood that we shall have eventually, in the not too distant future, to be thinking in terms of the 80 per cent rather than the 60 percent, that will involve, if we are to do it over the whole of the UK, a virtually carbon-free electricity system by 2050 - take a deep breath at that point - how do you get from here to there and what is the timing of the key decisions in that process, bearing in mind that we only have this limited time to do it? The importance of this idea of a time-critical pathway, which you can give other names to of course, is that it could provide real motive power to the operation of the arrangements envisaged at the time of the Climate Change Bill. We have not, as a group, yet formalised our response to the Bill, but it does seem to us that it would be a pity if it were purely an arrangement to arrive at carbon budgets and to regulate the carbon budgets without there being an input to all the detailed policies and measures that are required to get from A to B. Another point which we have put a lot of emphasis on, if one is looking at the monitoring accountability process, whether it arises from the Climate Change Bill or otherwise, is that the nature of the problem is such that it is not going to be enough to be concentrating on why last year's target is awry, what we can do to get next year's target back on course. This is the short-term thing. The accountability required really does fall into two broad component parts. The first is monitoring the delivery of short-term measures such as the Government have already identified in the climate change programme and so on, which will no doubt be enhanced by the White Paper when it comes out; the monitoring of that is how delivery is proceeding, whether delivery is being made possible and so on. That is one constituent part. The other constituent part is how you are laying the foundations for the longer term things that have to be done. There needs to be monitoring and there needs to be accountability on the effectiveness of the foundation laying for the longer-term transitions that will be required and it does seem to us that it is not possible to do this in an effective way unless one has thought through in detail something like the time-critical paths for the main sectors. These are our main points. Q236 Mr Caton: You mentioned the Energy White Paper, which is due shortly. The Government seem to be relying on measures in that to meet their targets for 2020 of between 26 and 32 per cent reduction in carbon emissions. What do you want to see in the White Paper and what criteria will you use to assess it? Mr Parker: I do not know what is going to be in the White Paper of course, but we brought out one or two things in our paper which we thought were unsatisfactory pieces of unfinished business in the last Energy Review Paper and we would want to see those covered in the forthcoming one. These were, if you recall, that the long-term study they were doing on the relative case for centralised or decentralised electricity - remember a study has been going on for some time - needs to be resolved sooner rather than later. Since this will have a very considerable impact upon how one thinks about whether there should be a reliance on carbon capture and storage, new nuclear power or whether there can be a hybrid of decentralised electricity consisting wholly of renewables, or a mixture of these and centralised power plants and so on and so forth, that seems to me to be an extremely important one which they have got to make progress with. Others are that we have not yet seen any formal discussion of the extent to which the overall fiscal regime and the EU and UK competition rules assist or impede low carbon policies. That seems to me to be a missing plank in the armoury we have to consider these matters. Finally, you mentioned that the climate change programme enhanced by the last energy review more or less gets us to where we want to be in 2020, if it is delivered, but there was a great uprising of scepticism when these numbers came out. One would want to see a great deal of explanation as to why people think that this can be done. This brings us very much into the territory that Paul Ekins was talking about a few moments ago, but it does seem to me that the credibility of the enhanced climate change programme is very, very important indeed at this stage of the game. Those would be the things that we would look for. Q237 Dr Turner: You have called for more research on how customers actually use electricity. Can you describe what you mean by that in greater detail and what the benefits would be? Dr Rhys: I was thinking of what used to be done within the old nationalised industry structure where we had very comprehensive load market research programmes. We had a very clear idea of both the ownership of different kinds of appliances, different kinds of boilers no doubt within the gas industry and of their average consumptions. A lot of those programmes disappeared more or less completely at the time of privatisation and the setting up of the new energy companies. I would not by any means claim that those programmes were ideally suited to current purposes, but from my own experience of running that programme within the electricity industry, it is very clear to me that you could, for a comparatively modest cost, set up a programme which would tell you much, much more about, for example, the stock of domestic boilers, how old they were, the stock of aged and inefficient appliances, the amount of energy that was used for lighting and so on and so forth. My view is that provides a basis for the monitoring of policy which is currently absent because all we seem to have is very aggregated figures for the total of residential consumption, the total of industrial consumption and so on. Q238 Dr Turner: If you actually had this information, which you do not, on consumer demand habits, how do you think it could be used to inform government policy and actions of electricity companies in reducing the overall demand for electricity? Dr Rhys: For example, I know simply from reading the paper every day that a lot of people place a great deal of weight on low energy lighting. I have not seen any recent estimates of what percentage of electricity consumption actually goes into lighting; I believe it is about 10 per cent, I believe it is important but 10 per cent is the limit of what you can achieve. Suppose though that you discover, as I discovered recently to my chagrin since I have just disposed of a 35-year-old freezer, that it was accounting for about 40 per cent of my electricity consumption and I have now decommissioned it and cut my own emissions by a huge amount. I have no idea what the total national stock of such aged monsters is, but it would be quite easy, I would have thought, to put in quite a cheap policy to encourage people to get rid of them, but I do not have the information to say whether that is a big saver or not and certainly the whole of the domestic sector is full of little questions like that. What are the potential gains from moving to condensing boilers for example? One would need to know precisely what the stock of aged versus new boilers was. Q239 Dr Turner: Of course, this sort of research on social patterns of consumption is not the only casualty of privatisation, because what was once a very large R&D budget, in the days of the CEGB for instance, disappeared virtually completely under the private utilities. Do you think that this is affecting their whole behaviour because they are just not focused on long-term issues and climate change considerations but simply short-term cost efficiency measures? What can we do to substitute for this sort of effort that used to exist before privatisation? Dr Rhys: To be fair to the energy companies, I suspect that what you are saying is probably absolutely right in relation to some of the supply activities but my impression is that if you take the totality of the oil companies, the big generators and so on, they are very, very conscious of what is happening on climate change issues and it is strongly in their interest not only to be aware of those things but to try to anticipate trends. I should be very surprised if they, in the long run, do refrain from the appropriate levels of research. There are a few other issues associated with the privatised framework that perhaps deserve a little bit of comment. One is the whole framework of regulation. Regulation, Ofgem and so on, has objectives which are essentially concentrated on competition on the one hand and protection of the consumer, reduction of consumer prices, on the other. Those are very laudable things to be doing but they are sometimes going to be in conflict with carbon reduction initiatives and it is very, very difficult for a regulatory authority to have multiple objectives. The other criticism I would have is that, if I look at the supplier market in gas and electricity, personally I do not find it terribly transparent in terms of the prices and tariffs that different companies are ready to charge me. Q240 Dr Turner: I was personally very unpopular with government whips during the Energy Act for attempting to give Ofgem different responsibilities, in particular what could best be described as a climate change responsibility which it now has to a degree in that it has an obligation to sustainability but how effectively do you think it is discharging that and how effective is Ofgem being, for instance in its current recognised remit of consumer protection, given the massive windfall profits that generators made during the first round of the ETS? The benefits of which, to the best of my knowledge, have not been passed on to customers. Dr Rhys: Of course the generators are not regulated directly as to pricing because they are deemed to be part of the competitive market and suppliers will purchase from them and pass the costs through. It is a commonplace among merchant bankers that when you start on something like this, it is very difficult to avoid generating windfall profits for clever operators and there are many clever operators out there. The more general issue is that it is actually very difficult to change the culture of regulation, particularly when you have primary objectives that are focused on consumer protection, competition and so on. That is a much harder issue to tackle. It is going to be very difficult for Ofgem to consent to break with its own tradition. Q241 Mark Lazarowicz: In your memo, you argue that concerns over the impacts of carbon reductions on the competitiveness of the UK economy have been exaggerated. Would you like to expand a little more on that statement? Dr Rhys: First of all let me say that I agree in principle with the general argument of principle that it is important that UK industry should not be disadvantaged relatively and that is particularly important, if the outcome were to be a transfer of industrial activity away to countries which may actually be less carbon efficient than we are. It is also possible to exaggerate the likely scale of carbon measures in the context of competitiveness for a number of reasons. One is that, first of all, the relevant CO2-intensive industries are a very small part of overall GDP. Secondly, we are talking very largely in the context of EU trading as to the actual measures which are involved so there is going to be very little interim EU impact and I would expect extra EU impact to be dealt with at an EU level. As far as most industries are concerned, energy costs are really quite a small part of the total and the overall effect of competitiveness, even if you are talking about energy taxes, is essentially going to be dwarfed by the much broader impact of exchange rate issues which of course impact not only energy costs but all domestic costs including wages. Then I guess finally, in terms of the sectors that we have identified as being the key ones to focus on, electricity, buildings and transport rather than industrial processes per se, if necessary, if one did see serious competitive disadvantages which were also going to be energy inefficient, then they could if necessary be dealt with by appropriate derogations. That is my general perspective. Q242 Mark Lazarowicz: To what extent do you think the UK will actually benefit from a greater investment in low-carbon technologies? Are there opportunities for us both domestically and internationally? Dr Rhys: In a dynamic sense yes. Our feeling is that by being at the forefront of what is going to become a worldwide trend, we do have the opportunity to benefit very substantially. That is separate from what I might call the short-term, very obvious impact of price or taxation changes. Chairman: Thank you very much for coming in. We have absorbed both what you have written and what you have said in the last half hour or so. We are very grateful to you. |