House of COMMONS
MINUTES OF EVIDENCE
Environmental Audit Committee
Tuesday 17 July 2007
DR NICK EYRE and MR BRIAN SAMUEL
USE OF THE TRANSCRIPT
Taken before the Environmental Audit Committee
on Tuesday 17 July 2007
Mr Tim Yeo, in the Chair
Mr David Chaytor
Memorandum submitted by The Energy Saving Trust
Examination of Witnesses
Witnesses: Dr Nick Eyre, Director of Strategy, and Mr Brian Samuel, Head of Policy Research, The Energy Saving Trust, gave evidence.
Q101 Chairman: Good morning and welcome back. You became familiar to us with the Energy Saving Trust (EST). As you know, I have had a particular interest in the EST right from the start. Would you like to say what progress you think you have made over the last 14 years in improving domestic energy efficiency and making the public more conscious of their own carbon footprints?
Dr Eyre: I think we have made progress and, more broadly, a lot of progress has been made on household energy efficiently. We see the rates of some of the key investments - loft insulation, cavity wall insulation - increasing. We have obviously seen a huge switch in the boiler market from traditional boilers to condensing boilers. We have seen a very rapid growth in the use of A-rated appliances. It is often difficult for us to unpick exactly what our role has been in that in terms of providing information and advice from the other key measures, the changes to building regulations and the changes to appliance labelling and standards, the entry efficiency commitment. I think we are confident that we need action on both the supply side and we need the products and investments to be there. Those are the sorts of things that EAC generates, but we also need to generate the customers, cities and interest in the agenda, which we see as our role. Have we done that sufficiently? No, we have not. Currently, we talk to just over one million people a year, but that is not sufficient. We would like to be talking to more people than that and getting even more serious engagement, given the seriousness of the climate change problem that we now face, and we are talking to government departments about how we might do that.
Q102 Chairman: Where there has been reluctance on the part of people to respond, do you think that is because they do not want to or because it is practically difficult for them to do so?
Mr Samuel: I think it is a combination of reasons. Certainly with some people there is a lack of willingness to embrace the issue. We know now that 80 per cent of the public recognise the threat of climate change, but out of those, 40 per cent are not taking any actions. There are a number of reasons and barriers for them to take action. The first is probably a lack of awareness of what actually to do, where to go for that advice and information and signposting to the most efficient products to buy. We are looking to change routine and purchasing behaviour. On routine behaviour, we know that people do turn off lights. However, they do not necessarily use public transport. It is about signposting people to the right information. Some people do not have the necessary finance to invest in the most efficient energy-saving products, and so there is a fiscal barrier. There is also a lack of trust as well in the energy suppliers, for example, so that on the energy efficiency commitment, whilst it has been successful, the people still do not understand why energy suppliers would be selling energy saving to them. There is a whole raft of reasons why people do not actually take action. They do need support from a variety of sources through fiscal incentives, through regulatory instruments and through the provision of information and advice.
Dr Eyre: I think most people see the sense in energy saving in the way that the EST used to sell energy savings, and still largely does sell energy saving, that it is good for your pocket. In terms of the climate agenda, as Brian Samuel has said, most people accept that there is a problem but many people are not in their own lives doing anything significant about it. There is a big group of people in the middle who are now convincible to take action but not convinced. They conceptualise the problem as your problem. They see it as an issue for government, perhaps politicians, perhaps for big business. I do not think we have yet won the argument with the majority of the British public that it is also an issue for them,
Q103 Chairman: In a sense, the easy bit was getting people to do more energy efficiency at home but that does not involve a great lifestyle change. In your memorandum to us, you identified behavioural change now as a priority. That is likely to be more difficult. How much behavioural change is going to be needed if you are going to get anywhere near the target for cutting carbon emissions by 60 per cent?
Dr Eyre: I do not like to unpick the question but I will. It depends what you mean by 'behavioural change'. In a sense, buying an A-rated fridge rather than a C-rated fridge is a behavioural change, but it is rather an easy one and that is where we have done rather well. The behavioural changes of getting on the bus rather than going in the car or the behavioural change of not going abroad by plane for your holidays are more significant and it will take longer; it will take more effort. It needs a sustained effort across parties but also between government, business and organisations like ours. We are seeing some slight changes in those behaviours, but not very much at the moment.
Q104 Colin Challen: We do seem to be inching along towards behavioural change on the current policy of voluntary efforts and some forms of taxation. Do you think perhaps that what we really need might be the big bang approach of personal carbon allowances to actually get to the point where we are seeing real, large reductions in domestic energy use?
Dr Eyre: It is a good question but it is a very difficult one. Our view is that more research needs to be done before we would be willing to put our hands on our hearts and say that is definitely the right way forward, but it is certainly an area that we think is promising because it is, as you say, potentially a driver of behavioural change by forcing a recognition that personal action is part of the problem and part of the solution. There is the potential for triumph in that policy. There is also the potential for disaster as well because, in the current state of commitment to personal action, I do not think that it would work. That does not mean that public opinion will not have changed sufficiently by the time we could implement policy and personal carbon allowances, but if 80 per cent of the people are not going to change their behaviour and buy more allowances, it would not have a great deal of effect. Any market needs people to understand it and respond to the pricing laws. What we are saying is that at the moment public understanding is not at that level.
Q105 Colin Challen: Do you think that such of scheme would add anything more than simply sending out a price signal, which people may reject or just ignore, as they have, if you like, the price signals of energy going up in cost over recent years? That really has not changed a lot of people's view about energy efficiency in their homes.
Dr Eyre: That is the question. If the effect is purely as an economic instrument at the sort of price that any government is likely to allow, then the effect will be relatively small. It only becomes an effective instrument if it has a non-price effect and people recognise that the quantity restriction is telling them something about the way that we all individually need to behave. The answer to 'will that happen?' has to be: we do not know until we try it. We cannot know, but we can work in that direction. We can get people to know what their carbon footprint is, for example. If people do not know what their carbon footprint is, they do not know whether they would be a buyer or seller within a trading scheme. That is a pretty fundamental thing that they need to understand before they can engage with the system.
Q106 Colin Challen: The EST, in previous evidence to us, was very keen on schemes like Centrica's incentives for people to get council tax rebates if they installed insulation and things of that sort. That has had apparently led to some quite big conversions. Even if the financial incentive was not all that great, I suppose people hate their council tax so much, that anything off it seems disproportionately large. Would the EST prefer more of those sorts of things rather than a big single policy solution? Do you think that you could tackle the problem effectively with a multitude of those sorts of approaches rather than a single solution?
Mr Samuel: I do not think personal carbon allowances would be a single solution. You would still need other mechanisms and other measures in place to support consumers and help them take the actions that their personal responsibilities through a PCA scheme would demand. In relation to the example of the council tax rebates, those would be fine for hard measures, measures that require investment in energy efficiency or in micro generation, although the council discounts for micro generation would either possibly be too small or would not be large enough in comparison with the actual costs. Personal carbon allowances are much more focused on behavioural change. Council tax incentives, for example, would not address behavioural change, although they are efficient in encouraging energy efficiency investment. It would be helpful to have a mechanism, or a combination of mechanisms, that allows you to tackle both behavioural change and the investments in energy efficiency or micro generation. Whether that is by council tax or in some other form, perhaps a continuation of CERT, remains to be seen but we do not yet know how the different policies will interact. That is another area of further research that will be required.
Q107 Colin Challen: As I described it, if you do have the big bang approach of personal carbon allowances, which is so universal in its application, you may have to start saying that that duplicates another effort which then can be abolished. At the stage when you get to that point, how you decide when is the right time to do that? Do you think that might be a problem?
Mr Samuel: Inevitably, you will never actually get the precise right time. Personal carbon allowances will always create winners and losers. Some people, those who have taken action earlier, might benefit more than those have not taken action, but we do not yet know. We need to identify who would be the winners and losers under such a scheme and what measures they might be able to take and when those measures are likely to be taken. There is also the need to identify crunch points, if there are any, whereby certain families, depending on where they live, cannot actually do anything else. To come back to your original question, everything is interrelated and it is complicated. Inevitably, whatever decisions will be taken will have consequences.
Dr Eyre: Personal carbon allowances would set an overarching instrument for individuals and carbon but that would not of itself address every barrier to behavioural change and investment that Brian mentioned earlier. There still would be a need for specific interventions. Better metering is a good example. It is very difficult for people to interact sensibly with the market when they do not actually know what they are using. There would be a range of other interventions that would still be needed.
Q108 Mr Chaytor: What is the role of energy suppliers in this? Do you think that any of the major energy suppliers have given serous consideration to this concept?
Mr Samuel: The best people to answer that are probably the energy suppliers. There will certainly be a difference between those energy suppliers for gas and electricity who operate in the energy efficiency commitment CERT market and those suppliers of fuels outside that. One of the advantages of personal carbon allowance schemes is that they will capture transport. I do not know what the suppliers' views are. I suspect that as CERT becomes harder for them to meet, then they will look for alternative mechanisms. One of the advantages of a personal carbon allowance scheme is that it creates the consumer pull, which you do not have under CERT at the moment. Certainly having some form of PCA scheme would help suppliers meet whatever targets or obligations they would have.
Q109 Mr Chaytor: At the moment, from the public's point of view, the message from suppliers is that the price is the key difference between companies supplying. Since the fall in wholesale gas prices over the last few months, there is a big focus on marketing. Is there some way in which you and other agencies could have a role in persuading suppliers that, as long as they focus on cheap energy, this is a positive disincentive to households and businesses from taking energy efficiency measures seriously?
Dr Eyre: We have tried to do that over most of the 14 years that we have been in existence. I would say that it is one of our failings, and indeed the suppliers' failings, that no-one has made energy services to households work outside some particular niche markets. I would add to that: it is always going to be difficult for suppliers to make that work whilst they are regulated in a way that means that they make bigger profits by selling more. Regulating them in such a way that they make big profits to sell less is quite a regulatory challenge, and I do not know anywhere in the world that has succeeded in doing that in a fully liberalised market. I think that is the challenge if we want the energy suppliers to make energy services work for us because it is not reasonable to expect them to change their business model to one with a lower profit margin.
Q110 Mr Chaytor: So Ofgem is at the heart of the framework which Ofgem offers in this?
Dr Eyre: It is not just Ofgem but the way that most commodity markets work, whether they are regulated or not; people make more money by selling more.
Q111 Mr Chaytor: What do you think about the suggestion that has been put forward by the Environmental Change Institute that there should be an obligation on suppliers to reduce average household carbon emissions year on year, a kind of parallel instrument to the energy efficiency commitment?
Mr Samuel: There are two models of the suppliers' obligation: one is the cap on trade approach where the suppliers take the cap and then take ultimate responsibility for reducing consumer demand. There are concerns about that because of the events that are outside the control of suppliers; for instance, weather, consumer trends, et cetera. That would probably be difficult. The other leading model for a suppliers' obligation is one of a more market‑based CERT; and by that I mean a measures based approach similar to the existing CERT but with the ability for third parties to participate directly in that; i.e. some form of white certificate trading scheme. We certainly feel that the white certificate trading model is worthy of further investigation. Whether the suppliers' obligation could operate in parallel with a PCA approach would perhaps be difficult because you would have issues around the ownership of carbon that would certainly need to be resolved. Is it the suppliers who own the carbon or the individual members of the public who own the carbon? We have not mentioned the European Emissions Trading Scheme but you do have potentially a third scheme. Whereas we can see an upstream and a downstream approach working together where the upstream approach tackles the carbonising of the grid, it would be very difficult to have an upstream, downstream and midstream scheme.
Q112 Mr Chaytor: I think I understand that. Still on the role of suppliers, is the issue of the structure of tariffs almost another way of implementing what a personal carbon allowance scheme is designed to do? Some suppliers, for example, have recently restructured their tariffs so that the greater the household consumption, the more expensive the unit of electricity or gas consumed. As I understand it, the majority of suppliers still operate exactly the other way round?
Mr Samuel: There is clearly a role for more innovative supplier action in the design of tariffs. Again, it is different between electricity and gas because gas is settled on a daily basis, so there is less incentive. Electricity is set on a half-hourly basis, so there is a far greater incentive to do something on the tariffs, but you need the tools to do that. We come back to the argument about whether you actually need smart metering or not. If you have smart metering, you can have more innovative tariff options. To me, that is a real driver for smart metering. There is certainly greater potential in electricity than gas, but there is potential in both.
Q113 Mr Chaytor: Coming back to the question of upstream and downstream and midstream, if a personal carbon allowance scheme was introduced, how would that work? You mentioned problems of running in parallel with the EU ETS. What about other policy measures, such as the energy efficiency commitment to the renewables obligation? Is the field too crowded or would it be necessary to start from scratch really if a PCA were introduced?
Mr Samuel: One of the starting points for analysis of the potential for PCAs would be to investigate the strategic fit with existing policies. We cannot answer that now but, yes, it would be crowded and some policy measures would still be required, for instance, the provision of information advice, whereas others may not be, and a renewables obligation could be one of those, particularly given the EU ETS.
Q114 Mr Chaytor: Finally, in terms of importance of smart metering, as you mentioned, would any other and specific support measures for households be needed if a PCA scheme was introduced?
Dr Eyre: I would say this, would I not, but I think the Energy Saving Trust programme, which advises people on what their energy use is, what their carbon footprint is, and, more importantly, how it can be changed, provides the key piece of information that any individual needs to participate effectively in a personal carbon allowance market. Until we have that sort of information, the market will not work because it is a fundamental principle of markets that they only work properly when people are informed.
Mr Samuel: At the moment, people do not have the means to get advice on eco driving and modal shift. With transport being included in the PCA scheme, then further measures will be required.
Q115 Martin Horwood: Could I ask one more question at the end of that? Do you feel that you have really embraced all the technologies required to make popular the whole concept of people measuring their own carbon footprint? There are lots of new websites and NGOs coming up with ways of measuring carbon footprints. If it is such a crucial part of your mission to communicate that, do you feel you have really done a good job in terms of communicating to the mass of the population and making that available to the population in an attractive and engaging way?
Dr Eyre: I think we probably have not gone far enough yet. We have been working with Defra on the carbon calculator that is now available on their website, which we think contains the most reliable assessment of a personal carbon footprint that you can get. I am not sure that a multiplicity of different carbon calculators that always give people different answers is all that helpful in communicating with people. In a sense, we are transitioning from a world in which the best way to get people to reduce carbon emissions was to tell them it would save them money to a world we hope we will begin when people fully understand the effects of climate change and take action for that reason. Primarily with most people we are still in the former world, and for our communications to be effective, they have to recognise that for most people it is still going to be more effective in the short term to tell them: save energy because it saves you money. We also have to look to the future and develop new tools to address the new world we want to move into. That is the balance that we are trying to get right.
Q116 Martin Horwood: That links to my next question. You said in your memorandum to us that according to opinion polls, the idea of a personal carbon trading is "overwhelmingly unpopular". That was the phrase you used, but you said that "with the right policies, it is possible to transform attitudes that will increase the acceptance of PCAs to the extent that would allow politicians to implement a PCA scheme". What do you think those policies would be that would achieve this transformation?
Mr Samuel: I know at the moment we are at a point where people do accept that climate change exists, or the majority, over 80 per cent, and some 68 per cent of people actually believe that it will impact on them specifically within the next ten years. We have the basis on which to work with people so that they do start taking action. We are seeing a very gradual shift towards the number of people who (a) are starting to take small actions, and (b) starting to take larger actions. There is only 4 per cent of people who in their everyday lives are taking major actions. We need to start shifting people to the right of that. We can do that in a number of ways. One of the best is by using real examples within the local community as to how people can make a difference.
Q117 Martin Horwood: I am well aware of the general need to do that, but we are focusing specifically on personal carbon allowances, which you said at the moment is an unpopular part of that mix. You could not have more media and public awareness of the issue generally, yet that remains an unpopular solution. What would change that?
Mr Samuel: What we need to do is to explain what personal carbon allowances actually are - people do not really understand that - and what it might mean to them and what the alternatives are if we do not do something, but also to look at the alternative policy measures as well. You may have a cap on the one hand or you may have localised flooding on a regular basis on another hand. It is about bringing the issues to a local meaningful level to the individuals so that they can see it will impact on them if they do not do something and to help to inform them that they can do something.
Dr Eyre: It does come down to people's understanding of what it means for them and at the moment a lack of understanding of it. If people conceptualise personal carbon allowances as something like rationing plus identity cards, which is the way they could contextualise it, then we are going to have a problem selling that to them. If they conceptualise it as a fair way of cutting a limited carbon cake between different people and then a relatively efficient way of dealing with that, that is more saleable. We just have not done that sales job yet.
Q118 Martin Horwood: You said in your last reply that in the end you have to relate this to the bottom line for people.
Dr Eyre: At the moment, that is what people tell us: we are more interested in the bottom line. That is only saying what the state of public understanding about climate change is at the moment. That is moving. I am confident that will continue to move and therefore we need to think through the policy instruments that will work with a different set of public understanding.
Q119 Martin Horwood: If the idea of personal carbon allowance as currently indicated is overwhelmingly unpopular, where is the tipping point in terms of popularity that will enable people like us to push ahead and implement something like this at government level? Should we aim for 50 per cent acceptance and then try to grit our teeth and tough it out with the other 50 per cent, or do you want it to be overwhelmingly popular before we could try to implement it?
Dr Eyre: Personally, I think it would need majority support before it would work because we know of changes in public policy that have been pushed through without public support that have failed. The poll tax springs to mind, for instance.
Mr Samuel: If it is identified as the most cost-effective option, then the support levels that would be required would be lower than for other options that may be more cost-effective. You need to look at it in the context of what else and be done at that particular time. Ultimately, I do believe personal caps will be required, but it is a question of when and how you get there, and your question alludes to that. It does not necessarily have to be 50 per cent, but you do need that groundswell of opinion.
Dr Eyre: People will need to believe that if it comes, it is coming to stay. I think that does mean that it needs some level of political consensus as well if it is going to be established effectively.
Q120 Martin Horwood: Can I ask you about some of the people who may be suffering perhaps from fuel poverty at the moment, people in the more marginal situations? On the face of it, they should gain from a scheme like this. They are more likely to have a low carbon footprint at the moment and therefore be in credit in terms of their per capita allowance. Say, they cash that in, as would be the obvious temptation, at the beginning of the year and then find themselves in exactly the same kind of budgeting problems that they had with their financial situation. Do you think that is going to be a problem? Do you think there is a marginal population that is going to find this rather an onerous system and psychologically perhaps a financially difficult one?
Dr Eyre: The system will only work if it is made easy to work and if there are easy ways to trade, easy ways to buy. We would expect that most of the energy suppliers in both the gas and electricity markets and the petrol/diesel market would want to offer an option whereby they sell you the credit as they sold you the fuel essentially.
Q121 Martin Horwood: If you make it easy to trade, surely you will make it easy for someone who is hard up and struggling to make ends meet to cash it in at the beginning, are you not?
Dr Eyre: Yes, you are.
Q122 Martin Horwood: Are they not then going to get into the same problems they get into with credit and debit on the financial side?
Dr Eyre: That is possible. Of course, it depends fundamentally on what price is generated in this market. That has been the subject of relatively little research and discussion, which is quite surprising because if the price is, say, £10 per tonne of carbon, this is all trivial to anybody's budgeting problem. If the price is £1000, then it is beginning to dwarf the price of energy. That research needs to be done. People are making hugely different assumptions. The piece of work that CSE did for Defra mentioned the price of I think £10 per tonne of carbon but did not have any evidence on which to base that.
Q123 Martin Horwood: Without making assumptions about a particular price, there are going to be some people who are going to suffer under this scheme who are going to be relatively poor. The classic one would be a pensioner with a three-bar fire who is using quite a lot of energy and does not have an easy way of escaping from that carbon footprint. Would you like a carbon tax credit system to be introduced to compensate for the unfairnesses of the system?
Mr Samuel: There are always going to be winners and losers. We need to identify who those winners and losers are going to be. I suspect the people living in rural areas, in sole occupancy, in stone buildings will probably be losers. You then need to put the appropriate polices in place to provide the support to those people who most need it. That will be as with any other social policy.
Q124 Martin Horwood: Is there not a contradiction there? Surely the whole basis of the system is to try to take those people who have a high carbon footprint and reduce that. Now you are saying that if you have a high carbon footprint ---
Dr Eyre: We agree with your starting assumption, which is that broadly speaking this will be progressive. Broadly speaking, people on lower incomes will benefit and people on higher incomes will not benefit, at least in the direct financial sense. You are absolutely right that society is more diverse than that and a single pensioner who has to drive five miles to shop and lives off the gas grid in a very inefficient home is probably going to be a loser. Then it is an issue for social policy as to who we deal with that. It is not really an area of our expertise but we recognise that research needs to be done to identify who these groups are and what social measures need to be put in place to deal with that.
Q125 Martin Horwood: Can I ask about one final group which might suffer in this scheme, and I speak as a parent here. I have two kids; they seem to use quite a lot of energy in various different ways. Should they have a carbon allowance - and that would help me enormously as a parent - or do you think that would then sharply diminish the amount of individual carbon allowance available to every person if all children had a carbon allowance as well. How do you think we should approach that?
Dr Eyre: That is another equity issues which you can resolve in a number of different ways, depending whether you want to benefit people with children or benefit people without children, roughly speaking. We do not have the research to tell you what the marginal energy and carbon impact of having children is. Clearly, there is a positive one. Households with children use more energy and carbon than similar households without children, but we do not know by how much. I guess, if you wanted to be fair, that is the sort of information you would have and then give children perhaps a lower carbon allowance, but essentially these are just choices that have to be made which have distributional effects but very little effect on whether the scheme would be effective or not.
Q126 Chairman: Can I ask you about pilot schemes in that case? We have had some mixed views about the value of pilots. One of the witnesses we had last week said that if there was a pilot, it might fail for reasons unconnected with the potential effectiveness or acceptability of the scheme. What is your instinct? Your own memo is a bit cautious about it. What do you feel about that?
Mr Samuel: It depends what you want a pilot scheme to test. If you want a pilot scheme to test the hardware, then that is completely different from having a pilot scheme to test how people will be able to respond. The problem with having a pilot is that in order to test reactions, then you have to have a mandatory pilot. A voluntary pilot will not attract those people who are least likely to take action, and so it would be difficult to come up with any robust conclusions. If you have a mandatory pilot, then it would be difficult to include transport within that because of the multi-point purchase opportunities, the number of petrol stations, et cetera, that you would have. Therefore, a pilot to test personal responsibility and how people would respond to their home energy usage only might provide some useful information. However, you then have the issue: what is the area that is going to have this mandatory pilot scheme imposed upon it? That is probably the most difficult question.
Q127 Chairman: Even if it was a virtual pilot and not actually financial?
Mr Samuel: If it is a virtual pilot, then you are not necessarily going to get the best results out of that. In order to get the most accurate, robust results, you need to have some form of mandatory scheme with penalties and compliance associated with that.
Q128 Chairman: Is that true in every respect? I can see in terms of greater changes of behaviour, of course that is true. If you want to test the acceptability and the workability of the actual technology, a virtual pilot would do that all right, would it not?
Mr Samuel: You can certainly test the technology without having a mandatory scheme. How you test public reaction without a mandatory scheme, I think would be difficult.
Q129 Chairman: This is a pretty radical idea and obviously it will generate lots of controversy. How do you think the Government should proceed now if it wants to try to gain public support for it?
Mr Samuel: Really, the Government needs, and has already through Defra, to initiate a detailed research programme. You need to test the wider strategic fit. You need: to test the equity and distributional issues and how people, as we have just mentioned, will respond; the degree of public understanding now; the degree of public understanding that will be needed to implement the scheme; to look at the technical and cost issues; and of course the actual detail of the scheme, the allocation, the identity of those people who will be participating in the scheme, et cetera. The only way to progress is through a comprehensive research programme. Of course (a) that will take time and (b) will take resources.
Dr Eyre: Politics matters as well. The idea is not all that new. It has been on the agenda since David Fleming's work many years ago. It was put on the political agenda by the last Secretary of State for the Environment and I think he is to be congratulated for doing that. I hope his successor will keep it on and I hope that leading politicians in other parties support that as well. That is the sort of sense that, yes, this is the direction we are moving; we may not know when we get there or in detail how we will get there yet, but unless leading influential people in and outside government say this is the sort of direction in which we need to go, it will not happen.
Q130 Chairman: Part of the purpose of this inquiry is for the committee to help keep it on the agenda and we think it is a positive thing to do. This is the final question. It is a slightly controversial proposal. Do you think it has the remotest chance of being implemented, given that at present we seem to be nervous of saying we cannot fly to Barcelona for £3? This seems quite a big step further from one we are not even prepared to take.
Dr Eyre: I will answer the question the other way round. We should be telling people they are not going to fly to Barcelona for £3 now and, unless we are prepared to do that, I agree that we will not get into a position where this will ever be workable.
Chairman: Thank you very much indeed. That has been very helpful.
Memorandum submitted jointly by Public Interest Research Centre (PIRC),
Centre for Alternative Technology (CAT), and The Lean Economy Connection
Examination of Witnesses
Witnesses: Mr Tim Helweg-Larsen, Project Leader for zerocarbonbritain and Director, Public Interest Research Centre; Mr Paul Allen, Project Director for zerocarbonbritain, and Development Director, Centre for Alternative Technology; and Dr David Fleming, Director of The Lean Economy Connection, gave evidence.
Q131 Chairman: Good morning and welcome. I think you have all heard the previous exchanges. Can I personally welcome you, David. I think you and I first discussed this idea at least ten years ago and possibly longer. I am delighted to welcome you to the committee to discuss this again. The zerocarbonbritain report is, by its own declaration, a very ambitious one. I want you to say a word to the committee about the project, the thrust of it, and in particular how personal carbon trading fits into your ideas?
Mr Helweg-Larsen: The name zerocarbonbritain came out a few weeks before publication. Our initial objective was to explore a set of policies and a scenario for Britain - a set of polices to be able to deliver the maximum energy savings and also incentivise the maximum amount of renewable energy update. We then explored a scenario of what we saw as potentially one of the most constrained possible scenarios that we could to explore an island Britain, one which had no flows of energy and fuel in or out. Could Britain feed and power itself within its own borders and coastal waters? What we found was that the answer is: yes, we do have the ability not only to provide the energy that can deliver our current levels of wellbeing, albeit in a different way, but we can also match a variable supply of renewables to a variable demand. In terms of how we achieve that, we explored - and by "we" I refer to Paul Allen and the Centre for Alternative Technology here - the various policy options out there. We found that we would definitely be needing what amounts to a cap and trade scheme. Our reading of the climate science is that this is an emergency situation. It is within that emergency context that we framed our scenario. So we were asking ourselves: how fast, under emergency conditions, can we move to zero carbon? We figured that two decades would not be unreasonable under emergency conditions. We then had to consider that that could be done by diktat but what would smooth the process most effectively? We have explored personal carbon allowance schemes. We found that the tradable energy quota scheme that David Fleming compiled has most comprehensively explored the issues and problems associated with a personal allowance scheme and then, not only explored them but sought to answer them, always through proven mechanisms, such as, and I dare to use the word, rationing and what we can see with the success for instance of Oyster cards, that the technologies and approaches that are incorporated in the system are all ones with which we are familiar.
Mr Allen: The project started really with the reading of the most current science. We have met up with Sir John Houghton, James Lovelock, we visited the Hadley Centre and talked Cox and Betts there, and we are mapping what seems to be unthinkable because the evidence compels us to do so. Rather than being bounded by forecasting from existing attitudes within the existing parallel, what we attempted to do was to back cast, to go to where the science tells us to be, and then evaluate polices and technologies that could build a bridge with where we are now, although we see the primary driver of this transformation as the market, setting up the right drivers in the market, to set us on a race out of carbon rather than a race into carbon. We have identified particular government interventions that will be vital catalysts and particularly to increase climate research and petrochemical depletion research, a vastly accelerated technology and R&D programme to get these technologies started now as we have a closing window of opportunity, but particular strong investment in new skills and training. When we talked to the Sector Skills Council, we did not find anywhere near the degree of urgency that we feel in those areas, so CAT is launching a major initiative to begin upskilling to give us the professionals that we need to transform plumbers and electricians to be skilled and ticketed ready for a roll-out of these technologies. The core of it is a national public awareness programme of what is needed going beyond what we do now. Transforming behaviour means getting the information you need, making sure that information is in the public domain and that the public trust it, and then transforming attitudes. There is an attitude that is comprised of the consequences of behaviour and we need more to directly link current behaviour to the consequences of that behaviour. When we can shift attitudes, then we can begin to shift behaviour. The change in our attitudes to smoking was essential to the change in the behaviour of smokers.
Q132 Chairman: Do you think that shift in attitudes can only be achieved by some sort of trading scheme?
Mr Allen: I think the shift in attitude needs to come ahead of a trading scheme. Once we have achieved the information we need and it is in the public domain and the shift in attitudes through the connections of the consequences of behaviour, then we are ready for the public to look at what sort of scheme will help us deliver that. When people are ready and understand the serious situation that we are in perhaps, bringing everybody up to speed is a bit much to expect but certainly a high proportion of the movers and shakers within society thoroughly understand that position, then carbon allowances would be seen as a leading contender in meeting that challenge.
Q133 Chairman: What led you to choose what you describe as tradable energy quotas as a variant? Perhaps I could ask David first what he thinks about it. What led you to pick on that particular model?
Mr Helweg-Larsen: We have looked at a focus from first principles at what the scheme needed to achieve as well as exploring some different options that had been spelt out, David's being one of them. I think we wanted to achieve a very rapid reduction in carbon and so we needed to have a government-implemented cap. We find that element of it. We needed to have a system that would be as efficient as possible and to look to something that was going to be an electronic mechanism. We needed a scheme that was going to engage all members of society - individuals, business and government - so that they are all focused on achieving the objective of moving beyond carbon. To do that, all of these groups need to have feedback: personal feedback, feedback from business and feedback from government. We currently do have a very powerful feedback mechanism in terms of how we use cash, but we need an equally powerful one in our use of carbon. Those are probably some of the central tenets to looking at tradable energy quotas.
Q134 Chairman: David, do you want to comment on that?
Dr Fleming: Yes. There are lots of different interpretations of what a personal carbon allowance may mean, and tradable energy quotas are distinctive in two fundamental senses. The first sense is that it is actually not based on carbon allowances. Personal carbon allowances are not a very good name for them. They are based on energy. The carbon involved in their combustion is mapped on to energy. What you do is you buy energy; you buy petrol; you buy electricity, in exactly the same way as you do at the moment. As a result, you do not need to know what your carbon footprint is; there is no need for smart metering. This is of the most fundamental significance because Chris Huhne and the Liberal Democrats, amongst others, have said, quite rightly, that it would take 15 years to set up the technology to measure carbon emissions and to measure carbon footprints. Indeed it would; it might even take longer. I doubt if it is feasible at all. You do not need to do that in the case of tradable energy quotas or TEQs because you just surrender units when you buy a gallon of petrol or when you buy some fuel. It is immensely simple. That is the first point.
Q135 Martin Horwood: Surely, the tradable energy quotas have to distinguish between renewable energy, energy with a very low carbon content and other forms of energy, so in effect, you do have to do the calculation behind it somewhere, do you not?
Dr Fleming: Yes. That is very easy. You do the calculation upstream. You do not do it downstream. That is the point. The downstream calculations of carbon emissions are enormously expensive and appear to require a civilisation changing effort. It is very easy and lots of people have done it - EPSU before they were abolished were doing it ten years ago. I have lots of numbers of those. We know what the carbon emissions of different sorts of petrol are. We know what the carbon emissions of the different sorts of electricity are, depending on where they come from, whether they come from renewables or gas or coal or oil, whatever it may be. In fact, those numbers are done very simply by a few high level calculations. Everything else is done on the basis of bottom-up. In fact, there is no problem. Carbon footprints are not a concept of which people are going to have to be aware. They are entirely concerned with the energy they buy and rated, as I said.
Q136 Martin Horwood: They are not really energy quotas, are they, because you would not need them to buy some kinds of energy?
Dr Fleming: I think energy quotas is the best name for them. The whole thing is based on energy. The whole thing is concerned with energy use, so we are not just concerned with encouraging people to buy energy with a low carbon rating, which indeed we would do, but actually we are also encouraging people to do the fundamental thing which a lot of this tends to forget and that is achieving an absolute transformation in the whole of the energy use of our civilisation. Civilisations in the past have not succeeded in such a transformation. The scale of this change and the scale of the way we change it in the use of transport and the way we grow food and the way we organise our economy is quite spectacular and is going to have to be done very fast indeed. That is the energy shift. Moreover, we need to bear in mind, and this is the second point I was going to make, that we are not just looking at climate change. It is becoming very clear now that we also have to set up a system which can accommodate itself to energy depletion. It is looking highly probable that the energy market will be breaking down in the next few years. I would argue quite strongly that any responsible government would right now be saying, even if they had never heard of climate change: we need to have a contingency plan to organise energy rationing schemes when oil and gas depletion kicks in, which is going to happen very soon. Even if they were not going to be used, the government would need inevitably to set up an electronic rationing scheme. There are two sorts of electronic rationing schemes. One is a paper rationing scheme with which we were familiar during the War; the other is an electronic rationing scheme. If it is an electronic rationing scheme, it more or less has to be tradable energy quotas. Tradable energy quotas are not my idea; it is a generic way of doing rationing if one is going to use the modern technology. We definitely do need a rationing scheme to be set up. In fact, the core of this is energy. If you design a system properly, then you get to the point of leverage so that if you just pull one string, everything else comes together. If we concentrate on our use of energy, then lots of other things will come into play. We will be addressing carbon in a very effective way. We will be addressing climate change. We will be addressing the whole question of developing renewable forms of energy with a low carbon footprint. All those things do come together, but they only come together if you focus on just one thing right at the start.
Q137 Mr Chaytor: Your zerocarbonbritain report refers to redirecting Adam Smith's invisible hand. My recollection is that Professor Stern said in his report that it was Adam Smith's invisible hand that led to the biggest market failure in the history of civilisation, climate change. My question is: are you sure that the pure market mechanism of tradable energy quotas by themselves will actually bring about the changes that you wish to see?
Dr Fleming: I am, yes, and the reason for that is that I think we need to understand Adam Smith and his invisible hand. There are various ways in which the invisible hand can work. Adam Smith, writing at the end of the eighteenth century, was thinking in terms of the market and in terms of money, which is very well recognised. What he is actually talking about is the common purpose. The common purpose is a system for bringing together individual aims with collective aims. There has to be a way of achieving a common purpose if a society is to hold together at all. There were previous ways in which the invisible hand would work. In the medieval period, there was a cultural way. The culture was the invisible hand. Tradable energy quotas are the invisible hand, I would argue, that we need for the common purpose exercise, the common purpose challenge, of transforming our use of energy. The invisible hand is right there; it is just wearing a different glove.
Q138 Mr Chaytor: What is the relationship between the downstream measures of tradable energy quotas and the upstream measures? Earlier you said that the issue of carbon content of energy was to be dealt with upstream. Your report does not say anything about the EU Emissions Trading Scheme, so how do you see the relationship, for example, between tradable energy quotas and the EU Emissions Trading Scheme or the other midstream measures of the energy efficiency commitment to the renewables obligation? Do they need to be all swept away?
Mr Helweg-Larsen: It is probably worth just making a distinction. David was not an author of our zerocarbonbritain report. We have certainly drawn on his work for it. David may still want to answer the question
Dr Fleming: Yes. The point is that the only way we are going to achieve this transformation is by recruiting the biggest energy resource we have, which is the intelligence of the people. Not only do we need to involve them but we need to make them want to achieve results. There are two ways of getting people to achieve results, which are very well understood in industry. This has been the biggest debate in industry over the last 60 years. One is telling them what to do and saying, "If you do not do this, it is going to cost you and this is the regulation we are approving and these are the instructions". That is yesterday's way of doing it. Unfortunately, in terms of public policy, our public policy does not seem to have caught up with lean thinking, which is now becoming very well established in industry and we are absolutely achieving transformation in consequence in terms of quality. Therefore, that is what TEQs (tradable energy quotas) are designed for, to say, "Sir, that is the energy budget you have got. The onus is on you to work within that energy budget. You have to recognise that the energy available to you in 20 years time is going to be this. You are right down to there. So you, sir, will need to get together with your family, your community and your employers to work and develop a common purpose so that you are the centre of a network of collective motivation. If you do that, and only if you do that, will you actually achieve serious results.
Q139 Mr Chaytor: I understand how the TEQs can reduce personal energy consumption. I do not understand how the TEQs alone, as you describe them, can result in a continuous reduction in CO2 emissions.
Dr Fleming: I am glad you have asked that because here is the picture in my reply. The whole thing is based on the carbon budget. A carbon budget is set 20 years ahead.
Q140 Mr Chaytor: So you are saying that you need other measures in addition to the tradable energy quotas?
Dr Fleming: No, that is intrinsic to it.
Q141 Mr Chaytor: You have referred to the carbon budget.
Mr Helweg-Larsen: If I might take up that point, we started off by saying, "What is the carbon budget for Britain?" That carbon budget is a budget over time but it has a budget every year and within that right down to the week. Those weekly budgets are going to be distributed under the TEQs scheme; 40 per cent is going to the domestic sectors and 60 per cent is auctioned to business and industry. That budget, on a weekly basis, is contracting week by week and business and individuals will have great confidence in the profile of that reduction because it will be defined by a carbon policy, much like the Monetary Policy Committee. We would know that right from the outset. There is the possibility to adjust that budget, maybe on an annual or five-yearly basis, in the light of changing climate science and what have you. In terms of how you achieve the reduction, you achieve the reduction because you decide what reduction to achieve at the outset.
Q142 Mr Chaytor: I am still unclear how the TEQs themselves will result in...
Mr Helweg-Larsen: We have a budget each week----
Q143 Mr Chaytor: Yes. It may be somebody else needs to pursue this line of questioning. Can I move on to the question of technology. Earlier you drew the analogy with the Oyster card, for example. Accepting the Oyster card works pretty efficiently in my experience but the difference is surely that the Oyster card is voluntary, that not everybody who travels on the London transport system has to have an Oyster card, whereas for a successful tradable energy quota system, everyone would have to be part of it.
Mr Helweg-Larsen: The underlying question is how do you "force" my gran to take on a carbon Oyster card when she might have no interest or what-have-you.
Q144 Mr Chaytor: It is a question of the scale of it also, is it not? We are talking about 60 million plastic cards as against 500,000 or so.
Mr Helweg-Larsen: Indeed. A carbon Oyster card is visually quite an easy way to grasp the TEQs concept but in practice you might find that it is far more seamless than that. It does not need to be so obvious. It could very well be - I think you would back me up, David - that if you have an existing credit card or debit card, your bank might be very keen to provide you an extra service and have the carbon data kept on that very same card. If you choose not to engage in any of this carbon trading at all, you could elect to have your tradable energy quotas cashed in the moment they reach you and so you just operate in a cash economy and the vendor of fossil fuels would charge you extra for the TEQs that they have to purchase.
Q145 Mr Chaytor: On the question of the role of the banks or suppliers of the card, you referred to a carbon card, not an energy card. What other infrastructure would be required to enable the banks to be able to offer that service?
Dr Fleming: The infrastructure is minor, in my view, in that the cards would not actually have to have anything except your account number, which would plug into the registrar. This is designed based on a system that has existed for many years of unit trusts. When you buy a unit trust, your holding is held in a central registry in an electronic way in exactly the same way - I used to work in the unit trust industry - and exactly the same system is used for this. All you do when you have a credit card, you access your account on the registrar and it is transferred. That is really very simple. It may very well be that the banks want to provide some ancillary services and indeed, there would be some services they would provide. For example, the tender, which of course is very well established for the issue of Treasury bills, as you know, would in exactly the same way as is used for Treasury bills, trickle-down purchases made by the bank on behalf of their customers into customers' bank accounts. Those accounts would have to be set up but that is very standard in accounting systems, so setting up another account for people is just like setting up a savings account. So in fact, the technology is really very straightforward.
Q146 Martin Horwood: If you have this account running, what happens when you have used up your quota?
Dr Fleming: The thing is that one needs to be aware, even though Tim quite rightly said that it is issued week by week, actually, on the very first day one year's supply of carbon release is issued, so in fact there is constantly a one-year supply in the market as a float, so it is extremely unlikely that anybody would actually ran out, but they may run out and, if they do run out, it is like going to a petrol station to buy your petrol. You have to surrender a certain number of units if you have run out of units or you have forgotten your card.
Q147 Martin Horwood: If it is likely to run out, how is it going to change behaviour?
Dr Fleming: What they do is they buy units on the market on your behalf and so you surrender units. The answer to your question now is in a way, there is a misconception unfortunately which Nick Eyre rather produced, i.e. when you run out, you go into the market and buy some more. That is absolutely right but the point, the crucial point is that the market is subject to that quantity constraint, is subject to the budget, so collectively, the economy as a whole cannot possibly go beyond the budget, and one needs to recognize that this is a guaranteed scheme; it is impossible for the economy to use more units.
Q148 Chairman: As you will know with your experience in the investment world, if someone has sold short, you get the most enormous price spike. If there is a quantified total available and someone is short, they have to get their pregnant wife to hospital by filling up the car with petrol, the price could be infinite because there is no supply in the market. I do not want to get too bogged down in details but your answer there I do not think really stands up to scrutiny.
Dr Fleming: Not at all, sir. The price of units is posted on petrol stations in the same way as the price of petrol and if for some reason they were to charge a lot for their units, the price would be on display, and you could just go round to the nearest hole in the wall and pick them up there. One needs not to imagine that the world is full of wicked monopolists.
Chairman: It sounds like the former Prime Minister saying, "We will march the offenders to the nearest cash point."
Q149 Colin Challen: The popularity of the proposal is in some doubt because Defra apparently has produced opinion research which suggests that 70 per cent of the population are either not very keen on it at all or may not be terribly interested and if you look at David Miliband's blog, you will see there is a great deal of hostility in many of the comments that are posted. Given that it can be quite difficult to have a pilot scheme some other kind of evidential base up front to demonstrate it is quite a good idea, how can you get round the public scepticism about this proposal in practical ways?
Mr Allen: The fundamental thing is to get across that the lifestyle changes that people will have to explore are really related to our bad attitude to energy over the past 30 years and the failure of markets and governments to foresee what the consequences of climate change would be. That is going to cause lifestyle change, not tradable quotas, and you have to get that shift in. There is going to be some unpleasant medicine regardless of which type of medicine we take and the displeasure at the taste should not be related to the medicine that is chosen but to the illness. Once that is instilled in society, the question of what techniques can be used to resolve this situation most equitably would produce a different response.
Q150 Colin Challen: It is a challenge for the government to try and prevent the unpleasantness from happening by introducing far-sighted, radical policies such as this perhaps to head off a crisis but until we have the crisis, as you say, perhaps people will not be so keen to engage with the policy. That is the conundrum that we have to resolve.
Mr Allen: The first scientific musings about carbon emissions were 100 years ago and if we had had the foresight in the 1950s and developed along a different technology line, we perhaps would not be in this situation now. It is essential to separate the actual tradable quotas from the bigger problem.
Q151 Colin Challen: How do you sell the policy as a positive product to peoples whose backs are against the wall?
Mr Allen: We also have to look at what other changes we need to make in society. We need to change people's health, we need to change people's diet, we need to change people's levels of fitness, we need to improve levels of social cohesion and community purpose. There is also a big need to deal with personal debt. If some of those can be instilled as additional benefits of re-thinking our attitude to energy, there are additional benefits we can explore.
Dr Fleming: May I pick up your point about motivation? I have five points and they may all be significant. Number one is a piece of research on motivation in Canada, particularly with old people and they are now extending it to the population as a whole, which shows a bimodal result. When they say, "What you think about the idea tradable energy quotas or personal carbon allowances?" they say, "No, not on your life. What a terrible idea." Then they have a discussion and talk about why they may seriously be needed and why they are the best solution, and the reaction changes completely: "This is absolutely right, and not only that, we will show other people how to do it." If it is well expressed, there is a complete flip in opinion. That is the first point. The second point is that we do need to recognize that there are these energy problems and if we are - and I think it is a matter of when we are - in an energy crisis, people will be on their knees for a rationing scheme. They may call it an entitlement scheme or whatever but if you have a rationing scheme, you can guarantee that when you want to buy your petrol, it will be there for you and it has your name on it. Without a rationing scheme people will be in trouble. The third point is when people say, "What would the effect of this scheme be? What will people think about it?" one absolutely has to say it depends on how steep the carbon budget is. If the carbon budget was hardly doing anything at all, it would actually have no effect on our lives whatsoever. So the whole effectiveness of it, the whole reaction of it, depends on the steepness of that and there will need to be a clear communication and interaction between the Carbon Policy Committee and the economy and people as a whole, working out how steep they can make it. There is no sensible answer to motivation and what people's reaction will be unless one specified the budget. The fourth brief point is that this will be a wonderful opportunity for the government really to do a useful job and to be on our side, because the Energy Policy Committee are the nasty guys but the government becomes the nice guy because the government is also part of the scheme; they too have to buy their units and therefore the government is not say "We are going to impose this taxation, this regulation, and if it is not hurting, it is not working." They are going to say, "We are all in this together and we are going to work with you on enabling you to actually achieve this." If someone is in trouble because they only have a three-bar electric fire for an enormous stone-built house, okay, we are going to help you in whatever ways come to mind, with money, with technology, with help and advice, in whatever ways come to mind so that the government is part of the scheme so that actually means there is a sense of common purpose. Finally, it is a sense of at last there is something to do; we can do something about it. I think one of the reasons why there is a reluctance to accept the climate change problem and the energy problem is that people do not know what to do about it. There is the law of reverse risk assessment: it is much easier to recognize a problem if you think there is a solution and if people say, "Yes, not only do we have this problem but we also have this solution" that could be fantastically popular and, as Tim said in his excellent report, it could even be a vote winner.
Q152 Colin Challen: The zerocarbonbritain report does foresee this scenario of a steep reduction in carbon emissions, which obviously affects our habits in relation to the use of energy but how steep can it be to be publicly acceptable? If you have a very steep curve downwards and that means the price of carbon rises very quickly, I would assume, people might be tempted to say, "Great! We have a windfall. We will go out and sell our units straight away," and obviously they may then learn there is a price to pay later on. If we did not have a steep curve, that might have greater public acceptability because, as you were saying, you could start off flat and it would not have much of an impact until you get the system embedded. What is the optimum curve to introducing this?
Mr Helweg-Larsen: I think the first thing to say is let us look at this as an emergency and, if this is an emergency, the public needs to understand this issue as an emergency and then our actions can be framed by that context. One of the things that I found quite invigorating and uplifting as we came to the conclusions of the report was that we did not when we set out know what carbon reduction we were going to be arriving at. We had not done all of our reading on the climate science at that point but as we worked on through it - and I am going to digress briefly into climate science - two key things came out. One is that we now understand from the contributing authors of the IPCC that there are numerous and very powerful feedback mechanisms in climate change and that this is leading us to an understanding of climate change. If we look at it as an explosion or as a bomb, the carbon emissions and our greenhouse gas emissions are much more of a detonator. The feedbacks represent far more the main charge, so there is this new perspective that we are just on the trigger really of this bomb. The second is that, because the atmosphere is cumulative in its concentrations of carbon dioxide and greenhouse gases, and because we are starting to realise that there may be significant sink failures to pulling those emissions back out and that the sinks do not grow at the same rate as our own emissions, it may be that we cannot add any more to the cumulative concentration of atmospheric greenhouse gases. It may be that we absolutely cannot add to that, and that means not emitting; that means zero carbon emissions, so it is zero carbon emissions probably yesterday. How fast? It is what I was touching on at the beginning; we need to frame it in that context and then, if we see that we are going to zero emissions, it puts a very different perspective on it than thinking about a 60 per cent cut or an 80 per cent cut or a 90 per cent cut, which just seems more and more constrained and impossible and you get to a 100 per cent cut and you say, "Am I dead yet?" The answer is no, there is life beyond carbon and it is quite refreshing to start exploring just what we can do.
Q153 Colin Challen: That makes very clear the nature of the emergency, which I think most of us in this room would agree with, but most of the people out there have a different idea, as perhaps evidenced by the polls that you referred to. A radical measure would not be welcome so the question remains politically how do you get from A to B and how do you sell the idea as a positive, good thing for people to engage with?
Mr Allen: I think Britain has a network of museums, galleries, science and discovery centres which are not engaging with this issue at all, and we have a National Curriculum which touches on it but does not really get to the core of what Tim has just said. If we can get the attitudes to the problem out there to be the same as the attitudes to the problem in here, then we have a fertile ground for introducing some sort of equitable system for dealing with it. The optimum carbon descent steepness curve is the one that begins immediately. The longer we leave it, we are moving away from the optimum because we are making the descent steeper and steeper, and therefore the social transition harder.
Q154 Colin Challen: Your memo has suggested that there should be an independent body created called the Carbon Policy Committee. I wonder if you could just say what differences that might have in comparison with the Government's proposal in the Climate Change Bill for a Carbon Committee.
Mr Helweg-Larsen: I think under the draft Climate Change Bill the committee that is envisaged there is similar in name but very weak in structure. It is nothing like as rigorous or as independent or as powerful, I suppose, as the Monetary Policy Committee that we have today or the Carbon Policy Committee that is envisaged.
Dr Fleming: Is it permissible to answer your previous question?
Q155 Colin Challen: Sure, with the permission of the Chairman.
Dr Fleming: The question was what would happen if the budget went down so steeply that the price rose and that would encourage people to sell, and there are three brief answers to that. The first thing is that the price absolutely does not matter. One of the fundamental rules of system design is that if there are two variables, one only has one degree of freedom. That is to say, if we have two variables, one is quantity and one is price, but it is only quantity that matters. Price can be flexible and it is because of that flexibility that the system works. It applies to any system. Lots of people do think, "Oh dear, supposing the price fell very low, the government would have to intervene." The price is completely irrelevant. It is entirely the quantity that matters. Because of that, the system provides a guarantee. The second point that is relevant is that we may well under-estimate the extent to which the political economy is able to reduce our carbon emissions. Terry Barker at Cambridge has done some interesting work on that and described something called "the announcement effect". The government does not even need to impose an instrument; all it has to do at the very start - I am not saying it is a substitute - is just to announce it and immediately there is clear evidence that people are reducing their energy demand. So in fact there is a substantial degree of softness in the economy and I think we would be surprised, certainly in the early years, how much the economy could actually respond when the energy availability goes down. The third point is that a steep carbon budget would have lots of very clear benefits. One clear benefit is that it would enormously improve our security because, as energy gets scarcer and as the agenda for climate change becomes more severe, any economy which is already a long way down in terms of their energy consumption will have an advantage. They will be more secure, they will have a competitive advantage, they will be less liable to disruptions. Clearly, all the motivation is towards a steep carbon budget.
Q156 Martin Horwood: If that steep carbon budget happens, is there not a risk? You say quantity is the thing that matters and price is irrelevant but price will have a huge impact on individuals. You can imagine a scenario in which rich people see the way this is panning out, fork out on all the photovoltaics, put ground source heat pumps in their swimming pools, they buy a brand new car which has a zero carbon footprint, and they use what of their quota they do not want to sell to pay for their holiday because that is the only way you will be able to afford it under this steep carbon budget. Poor people find themselves with a bit of cash if they have a relatively low carbon footprint are actually also trapped in houses and with cars and lifestyles that they cannot change because of that need for capital expenditure. So they end up perhaps with a bit of cash but unable to travel in the way that they could, probably unable to afford a holiday because the TEQs required will be beyond their means. This could be a very unequal system in the way it actually pans out.
Dr Fleming: I do not think I can really bear out that argument, for two reasons. One is that the higher the price, the greater the motivation there is for the poor to in fact reduce their carbon emissions and the more money they will get in when they can sell their surplus rations. One of the things which will be intrinsic with this will be that the government, which, as I said earlier, will be the good guys, would enable the poor - it would be an absolute priority - to reduce their carbon emissions and it will have enormous effects such as location of shops and location of jobs versus living.
Q157 Martin Horwood: I am sorry to interrupt you but that is new development. Most people have to exist in the world that exists now, where their shops are now and the way the housing estates are designed now. I can afford to put solar thermal panels on my house to reduce my carbon footprint but most of my constituents are not going to be able to afford that.
Dr Fleming: That is music to my ears, Mr Horwood. You are completely right. I am talking about transition here. The carbon budget goes down steeply but gradually, that is to say, there is a transition. It is hard to define in terms of words what it is. If one immediately has a one-step crash in the carbon budget down to nothing, which could indeed happen from the point of view of the energy market, but leaving that, if there were a one-step crash, then indeed there will be a one-step crash in poor people's behaviour but, as well as talking about a transition and as well as talking about this common purpose and this collective motivation, the thing does become really a matter of working together, and far more likely than your appalling scenario of the rich people getting into their Jaguars and driving to Spain or whatever it was, it is much more likely that there will be some communication between the rich and the poor.
Q158 Martin Horwood: My point was that rich people can afford to buy their way into a low-carbon lifestyle in a way that poor people cannot because their lifestyle choices are much more constrained. They might end up being the losers. Although they are relatively low now, they might end up relatively high.
Mr Helweg-Larsen: Perhaps I can respond on this. You are pointing out that there are going to be households who do not have the disposable income to switch to energy-saving appliances, that do not have the disposable income for insulating their lofts and, as the carbon budget shrinks week on week, they are going to find themselves in the position where they actually have to purchase extra TEQs on the market. Yes, absolutely. The scheme provides us with a core driver out of carbon in a race out of carbon. It does not fill every last nook and cranny. Not wanting to be derogatory, it does not solve all the world's problems but built into the scheme, given that 60 per cent is being auctioned to business and industry, if the price were to go high, to the extent there is value to these tradable energy quotas, there is a significant income to government to work with those groups which would be most disadvantaged and so there is going to be significant funds. There is also going to be an obligation on government to provide secondary legislation and to find all sorts of interesting ways to back that up. We have to prioritise the primary problems of climate change and access to fuel at all, and recognize that there is going to be no equity in a climate change disaster and there is no equity in a situation where fuel is completely unavailable to anybody.
Q159 Martin Horwood: Two final questions. Why are children not included and why weekly allowances?
Dr Fleming: Everybody is included, including children. Children are just included in a different way, that is to say, there could be changes to the family allowance and such things. The idea of someone as soon as they are born qualifying for a full adult version of the TEQs ration seems to me bizarre. The point is the scheme has a core. One can talk about the hard core and the periphery. That is peripheral. At the moment it is designed so that children are included through family allowances and then they get their adult ration at the age of 18.
Q160 Martin Horwood: Why weekly allowances?
Dr Fleming: Weekly works with the existing tender system and it seems to me that the smoother one can make it, the better. If one had monthly, there would be a certain ten per cent or more than ten per cent adjustment in the total float or variation in the total float because one year's supply of units put on the market on day one of the scheme, and then at the end of one month there will be only 11 months' supply, which will begin to affect the price a little bit, whereas if you have it weekly, the increment will have no effect on the market. It is just the smoothest way of doing it. One advantage of it being weekly is that the scheme is hands-free. People think, "Oh gosh, people are going to have their carbon calculations and their card." Actually, most people will not even notice the scheme exists from the point of view of messing around with cards and bits of paper. It is all done with direct debit and direct credit and things like that. There has been a lot of excitement about the paperwork and the decision making. With a hands-free scheme like this, everybody, no matter what condition, they may have Alzheimer's or be in a long-term care home, it actually works for everybody without condition and, under those circumstances, the weekly issue is no hassle at all.
Chairman: Thank you very much. I am sure we could spend the whole day discussing this extremely interesting subject. We are very grateful to you for coming in and shedding a little more light on your own ideas.