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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 534-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE
Wednesday 16 May 2007 MR RUPERT EDWARDS, PROFESSOR MICHAEL GRUBB and MR JAMES WILDE MR MICHAEL ROBERTS, MS GILLIAN SIMMONDS, MR GARETH STACE and MR ROGER SALOMONE Evidence heard in Public Questions 128 - 261
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environment, Food and Rural Affairs Committee on Wednesday 16 May 2007 Members present Mr Michael Jack, in the Chair Mr Geoffrey Cox Mr David Drew Patrick Hall Lynne Jones David Lepper Mr Dan Rogerson Sir Peter Soulsby David Taylor Mr Roger Williams ________________ Memoranda submitted by Climate Change Capital and The Carbon Trust
Examination of Witnesses
Witnesses: Mr Rupert Edwards, Managing Director and Head of Portfolio Management, Carbon Markets, Climate Change Capital, Professor Michael Grubb, Chief Economist, The Carbon Trust and Mr James Wilde, Director of Insights, The Carbon Trust, gave evidence. Q128 Chairman: Welcome to our second evidence session on the Draft Climate Change Bill and for the record we formally welcome Rupert Edwards, the Managing Director and Head of Portfolio Management of Carbon Markets for Climate Change Capital, who has just been trying to initiate the Committee into an early understanding of how the carbon market works; we are still in the infants class on understanding it, but you made a good effort and we are very grateful to you. From the Carbon Trust we welcome Professor Michael Grubb, their Chief Economist and Mr James Wilde, their Director of Insights. How good is your crystal ball, Mr Wilde, because we are all interested to know whether you think this Bill is going to be effective or not, because I notice from the evidence that you very kindly sent, when we are looking at the question of the targets you say in your evidence to us: "The Bill sets long term targets for a 60 per cent reduction in carbon dioxide emissions by 2050 and 26-32 per cent reduction by 2020. These goals are considerably lower targets than those called for by opposition parties and non-governmental organisations ..." It is a bit of a cop-out really; what do you think about the target, is 60 per cent the right number or not? Mr Wilde: The precise debate around whether the number should be 60 to 80 per cent for 2050 and the precise trajectory as to how we get there, whether we have a near trajectory or we have a lot of early action, is a specific question for the Committee on Climate Change. They can review available evidence based on the science of climate change and the need to reduce emissions, and also the impact on our economy and the competitiveness of our firms. Q129 Chairman: The reason I asked that question is that a number of our witnesses and indeed contributors have been a little bolder; they have put the argument that scientific evidence exists already - never mind about changes that might come - to say that 60 per cent is the wrong number and another number should be substituted, a number bigger than 60 per cent. You are in the carbon business, what do you think? Professor Grubb: If you would like me to add, there is still quite a lot we do not know. We know enough to be setting targets, we know we need to set targets right out to mid-century to give a good steer but the exact trade-off between what is doable economically and politically and in terms of getting society's buy-in to potentially quite substantial changes and the exact severity of impacts we are still going to learn about more as we go forward. I personally think that a target phrased as "at least 60 per cent" is a perfectly reasonable position to take at present, it should not be phrased so as to rule out the possibility of strengthening; I also think from my earlier background in international affairs it is questionable whether we would be able to tie the UK down lock, stock and barrel to something for the next four to five decades when we have got ongoing global negotiations about how much others were willing to do as well. Q130 Chairman: The reason I asked that question is that we are now running behind the simple linear extrapolation of the 1994 to 2050 60 per cent, one per cent a year, neat sort of figure, and the suggestion that others who, for example, advocated 80 per cent, they have said that there is more evidence around to suggest that a higher number like that should be the right number because, if you like, the global warming effects are worse than we had anticipated, but you are sort of saying it is all right to start off with 60 at least and give you a bit of wiggle room and take into account the economic impact. One might say that is a slightly wishy-washy position to be in. Professor Grubb: Actually I would argue the opposite. The key thing is what actions does this Bill engender and what actions does it engender now and over the next few years, and from some many years of observing target-setting practices in many governments, if one is falling behind on existing targets calling very shrilly to tighten the far out target is not a solution, if we are already struggling to meet a credible trajectory towards 60 per cent and saying it should be 80 per cent is not going to actually solve that problem - it might possibly create risks of devaluing the credibility of the actual commitment. Q131 Chairman: Do we really need this Bill? In other words, if you had some credible policies, as you have indicated, that would actually deliver on what we are supposed to be doing at the moment, do we actually need a Bill? Mr Wilde: There is a place for this Bill because it is going to create certainty over the aggregate emissions reductions that the UK expects or targets to achieve, and it also increases accountability for Government. That is important for two reasons. The first is that the five-year budget cycles that have been introduced will enable Government to set sensible, long term policies. If they are not on track within a given five year budget cycle they do not need to rush in new policies to get back on track, they can stick with sensible long term policies. Also, the system that has been introduced creates some level of certainty for businesses so that they can start planning the types of investments they need to make over the medium and long term. The flexibility and accountability that is within this scheme is also sensible, so it means that the Government are held to account, which is absolutely right, with the independent Committee on Climate Change playing an important part in that, but it is done in a flexible way so that over those five year budget cycles it takes into account adjustments in weather and in energy prices and, with the flexibility around borrowing and banking, it all makes for a sensible way to hold the Government to account. Really this is all about making sure that the Government set the right set of long term policies that are going to drive the right types of actions, both in terms of developing low carbon technologies, the right types of investment decisions and the right types of behavioural change so that we make a transition to a low carbon economy. Q132 Sir Peter Soulsby: Let me just follow that up because one of the major criticisms that we have heard from others of the Bill has been the argument that the five-year budgetary cycle is too long. Do I take it from what you are saying that you actually would reject those arguments, you actually think that the way the Government is approaching it is sensible? Mr Wilde: We think it is entirely sensible and we support the five-year budget cycle. Q133 Sir Peter Soulsby: What about the argument that five years is a long time, more than the lifetime of a Parliament, and governments can escape the responsibility for their own actions? Mr Wilde: Within the scheme there is an annual review process, so every year in effect the Government is held to account, and so on an annual basis the Government will have to say this is how we are performing versus the report that the Committee on Climate Change have put in place. That creates a political driver for the Government to make sure that they are putting the right long term policies in place to drive actions. Q134 Sir Peter Soulsby: One of the suggestions we had put to us was from the Energy Saving Trust which was for a rolling five-year average target. How do you respond to that as a suggestion? Mr Wilde: Can you explain how that would work? Sir Peter Soulsby: I am not sure I can. Chairman: Like any rolling target. Mr Drew: A moving average. Chairman: A moving average figure. Lynne Jones: Where you cannot borrow from years ahead. Q135 Sir Peter Soulsby: It seemed like a good idea when they put it to us. Mr Edwards: That is a nice mathematical idea and it might smooth out the bumps, but I do not think it is practical. One thing it might affect, for example, is the five-year periods that are likely to occur for budgeting for allowances in the Emissions Trading Scheme, and I am not sure how you could relate a five-year moving average target in the Climate Bill to that. I do not think it will work. Q136 Chairman: None of you favour an annual target? Mr Edwards: Industry in the past has been crying out for some long term clarity and three five-year budgetary periods is a pretty good deal. Professor Grubb: Can I add a couple of points? On the single year versus other periods I personally find it very, very hard to see how a binding single year approach would work, given the extent of fluctuations arising from weather and other things. Therefore, to make it credible you start adding lots of bells and whistles to what you really mean by a single year which ends up averaging it out over a few years anyway, so I just do not quite see the huge advantage of it, yet most actors are capable of thinking a few years ahead and seeing if they are, in these years, on the path for a certain average over the next five years of the budget. I would see an interesting idea in the moving average, but I am not sure I see the advantage, and actually does it not just mean that you have to define the average every year for the next 20 years as to what it would be and so forth. Coming back to your earlier question about do we need this Bill, I joined the Carbon Trust coming from a policy research background; what struck me was the scepticism that much of business has about general government policy announcements or declarations, or even decisions laid out in principle in a White Paper, and I think generally the somewhat sceptical business mind tends to need to see something a bit harder that has got either teeth, legal clarity or constitutional independence, a mandate to do things, which cannot really be lobbied away. It seems to me that the institutional security and clarity is one of the things that this Bill would bring which would actually add quite a lot to the credibility of what the Government has already said it wants to do. Q137 Chairman: Three colleagues have caught my eye so far and I am going to ask them - but I am just going to ask you to restrain yourselves, colleagues for a second - in this order: Lynne Jones, Patrick Hall and Roger Williams, but I would like, Mr Edwards, if you could just respond perhaps to give your own view about the 60 per cent target. Do you think the 32 per cent intermediate target by 2020 is sensible and do you think we need the Bill? Mr Edwards: It would be unfair to call it a cop-out, it is a pragmatic first step but could be reviewed by the Committee. There is a very strong argument to be made to say that the science is arguing for a tougher target, but it is a pragmatic first step. On the issue of should the UK be sticking its neck out when it is opening its hand in its international negotiating position, as I said to you earlier it is important that somebody shows some leadership and says "We will" rather than "We will only if you will." Chairman: That is clear, thank you. Lynne. Q138 Lynne Jones: It is really on that point, do you accept that if we are going to avoid dangerous climate change we are looking at trying to ensure that we do not increase global temperatures more than the 2o, and the scientific evidence is that the measures in this Bill are going to move us towards a 4o increase in temperature; therefore, can we afford to wait, to say let us leave the Carbon Committee to look at it for a couple of years? Why should we not be using the best possible science now to actually set targets that can actually achieve that aim, otherwise is it not dishonest to say that this Bill is going to avoid dangerous climate change? Mr Edwards: The probability projections would suggest that for 2oC you might want to have 450 parts per million CO2 equivalent, and that suggests that you need tougher targets, both by 2020 or 2030 and by 2050. Whilst it is a good thing that the UK is showing leadership on this, it is pragmatic to suggest that the UK is not going to solve the climate problem on its own. Q139 Patrick Hall: I want to pursue the 60 per cent a bit more, because what is on the face of the Bill is absolutely crucial and the signal that is given, and certainly Professor Grubb's position was, as others have said, this is a pragmatic first step to get the whole thing off the ground and start with something that is seen as credible by the public and particularly the industry, in other words do not frighten the horses and let us get going and then maybe adjust further down the track, but is that not really a political judgment, and that is what government is for? You are an independent trust, funded by government but not necessarily to do government's bidding; surely it is the duty of an independent trust such as yourselves to be guided by the science first, not making the political judgments for government. Let government do that - should you not be saying that the science now looks as if what we are plugging into the system requires a more ambitious target than 60 per cent? Should you not be saying that and why are you not? Mr Wilde: My initial reaction --- Q140 Patrick Hall: I was asking Professor Grubb because Professor Grubb was the one who was saying that we do not need to. Professor Grubb: On the institutional position or responsibility of The Carbon Trust I was going to let James answer, but my job anyway is to say what I think irrespective of whether I am The Carbon Trust or other institutions. Q141 Patrick Hall: Sorry, can I be clear then, are you not part of the Carbon Trust? Professor Grubb: I work half time for the Carbon Trust as chief economist, I am half time as an academic. I actually do not wish to draw any distinction, whichever hat you want me to wear when you ask the question, because you will get the same answer, which is that there is a lot that we still do not know in relation to both exactly how severe climate change is, about what is the capacity of this country and the willingness of this country to carry out a 50 year programme of major structural change in ways that are or are not contingent upon what the whole of the rest of the world may or may not be doing. Therefore, it is perfectly legitimate to say this is a really serious problem and we know we need deep reductions, but I do not think it is wise for us to cast in concrete for the next 50 years exactly where the end point should lie, it is highly rational to set out that we are confident we need to do at least this much, even if necessary unilaterally, because our position will make no sense otherwise because of the issue of leadership et cetera, but there should also be a recognition that the majority of scientists think actually we are probably going to end up needing to do more, it is not obvious yet that people fully know exactly what they need to do more; exactly the willingness of the British public, for example, to have the government stop them flying or other things that would be implied, for example, by an 80 per cent target. I do not think, therefore, that there is any inconsistency in saying this is real, this is serious, it requires immediate action, we are going to need to get to at least 60 per cent, that is already further than we actually really know how to deliver, but that is probably the guidance for the next few years because it might well need to be toughened up. Q142 Mr Williams: Professor Grubb said that if we were to have annual targets you would have to have lots of bells and whistles attached to them; lots of statistics do have that and it has been suggested we could make adjustments for GDP, for weather, for energy prices. The real problem with a five-year budgetary period is that this Bill is addressed to encourage secretaries of state to make very tough political decisions to address what most of us believe is the most serious threat to this planet. The real problem is that the secretary of state at the beginning of a five-year period is almost certainly not going to be the secretary of state in place at the end of the five-year period and so the political pressure is not there if you have five-year budgetary periods. Would you like to just comment on that analysis? Professor Grubb: I imagine either of us could but I am not sure that I would want to be a government going into the next election with it being blindingly obvious that we were trying to hand on to the successor government a failure to deliver on this budget, because it would generally be blindingly obvious by the time one approached the next election. I am not convinced that it is such a problem. Q143 Lynne Jones: I just wanted to point out that we do know what needs to be done, but it is whether that leads to political acceptance of it that is important. Surely we have to start talking about what needs to be done to actually even begin to gain that political acceptance. Professor Grubb: We are very actively talking about what needs to be done; it is a tremendous amount whether you are talking about 60 or 80 per cent. Q144 Mr Drew: Can I move on to the issue of sanctions, which I did press Rupert Edwards on before in the informal session. I am just concerned about this issue in terms of what happens if countries do not meet their obligations, and I know that this is a matter of European law but we have got other players in the marketplace and I raised before the issue of the ROCs and what happened there, where TXL went down the tube and there were difficulties persuading people to take on their ROCs. Just give me some clarity of what are the safety nets if - because there is a great deal of goodwill involved in this - things start to go wrong. Perhaps Mr Wilde will want to answer that or Professor Grubb? Professor Grubb: Just to clarify, you said the sanctions for countries, are you talking about sanctions behind international commitments or some specific agreement? Q145 Mr Drew: We have got international agreements and we have got, obviously, the fact that this is being played out by business and indeed other organisations, so there is something of a construct there anyway. What happens if individual industries blatantly ignore their corporate responsibilities in this area? Professor Grubb: I am probably best equipped to answer the international one and James perhaps on the corporate. Let me just say a few words about the international one. There is a long and complicated essay that people will give you, international relations scholars, about compliance with international law and then they will point to a statistic to say that nearly all countries observe nearly all international law nearly all the time, and then go into a long explanation of why. The basic underpinning of international specific commitments is not that there is a big enforcer that is going to throw presidents or prime ministers into jail, it is that countries are obliged not to ratify a treaty unless they fully intend to implement it, and that is why ratification is such a big and complicated step, that is the founding principle of international law in general and it is true that it is nearly always observed. When you then look interestingly at how things play out in the European context, you have 25 countries that have Kyoto targets and as part of the process of the European Commission, approving their plans for allocating emission allowances to companies, the European Commission has made an evaluation of are these countries on track to deliver their Kyoto targets, including whether they put enough money aside to purchase international credits that would help to bring them into compliance and so, again, compliance with international obligations is, in effect, a criteria that the Commission has successfully enforced in its implementation of the European Emissions Trading Directive. The question then comes on to enforcement on the individual company. Mr Wilde: In a sense that is a separate question to this Climate Change Bill because we are going down to the underlying policies that will drive the change. In each policy there is a set of enforcement criteria, so within the EU emissions trading scheme if, at the end of a given year, a company does not surrender sufficient allowances to cover its verified emissions it will need to buy those allowances on the market and pay a penalty of €40 per tonne of CO2 in the first place, €100 per tonne of CO2 in the second phase. Looking at other policies, in the UK we have the climate change agreements, energy efficiency targets where energy-intensive companies can get 80 per cent rebate on the climate change levy if they meet those targets; if they fail to meet those targets they have to pay the full climate change levy so there is a financial incentive for them doing so. Building regulations is another key area where enforcement is absolutely key if we are going to get the action required to get to our 60 to 80 per cent reduction by 2050, and enforcement of the regulations which are pretty tight at the moment and they are set to increase further with talk of zero carbon homes by 2016; enforcing those regulations is absolutely key and that is a big policy question. Q146 Mr Drew: Can I just be clear then, what is the safety net if either business does not do what it is obliged to do or countries do not meet their obligations? Mr Wilde: Within each policy there are set aside clear drivers for compliance, and at an international level within the Climate Change Bill it is quite clear that if the UK does not meet its five-year carbon budget it will need to potentially buy international credits exactly as Michael was saying, and it has a lot of political damage there. Q147 Mr Drew: What about being tested in the courts? Mr Wilde: Under judicial review, is that your question? Q148 Mr Drew: Has that got any real teeth? Mr Edwards: I will just repeat what I really said, I think, in the informal session which is the Commission's trading scheme directive in European law is a tough piece of hard law with very demanding compliance legislation, and punitive targets for not meeting it, and I do not believe that there will be very many companies that fail to meet their obligations under the Emissions Trading Scheme other than by accident. International environmental law is a different thing, the Canadians have already acknowledged that they are not going to meet their Kyoto obligations but clearly, as Professor Grubb has said, international environmental law, like all international law, tends to rely on a reputation rather than some kind of compliance mechanism. There is a compliance mechanism within the Kyoto treaty that says if Canada, for example, does not meet its obligations under Kyoto and wants to participate in international emissions trading after 2012, it will have its assigned amount unit in the next phase of Kyoto multiplied by 1.3 as a punishment. That is the only mechanism. Q149 Chairman: Target-setting in the way that you have both described is relevant, if you like, for those bits of your energy economy which can be affected by things like the Emissions Trading Scheme, but there are some bits which are missed out like the whole of the domestic sector at the level of the individual. The energy generators, yes, they are part of the scheme but, for example, the whole question of heat does not seem to figure, the transport sector does not really figure and one of the things that is interesting about the targets is that there is no attempt to assign responsibility, there is no sectoral breakdown. Do we need to be a bit more sophisticated with the target-setting and how far down do you go in allocating your share either at the level of the enterprise or the level of the individual that you are going to have to take to help the nation achieve its target? Professor Grubb: The Bill starts in the right place, which is national total emissions, and from that certain consequences flow about the need to address the whole range of sectors and the fact that the Government is going to be held accountable if it does not do enough across all the various sectors. Again there is a question about how much should be pre-judged and pre-specified in the Bill, as opposed to the Bill setting out the goal and in a pretty heavyweight form, such that one is confident the government will deliver it and leave it up to subsequent individual policy processes around the energy sector, renewables, housing, heating, transport et cetera to make sure that the Government uses those levers in those sectors to best effect. These are big questions, a lot of sectors and an awful lot of policy instruments and I am not sure one could actually encapsulate that level of detail in a single Climate Change Bill and I do not know if we know exactly the right balance between the different sectors either at this precise stage. Q150 Mr Cox: The question, Professor Grubb, that I thought you were being asked about - I may be wrong - was whether it is appropriate, as the Government contends in its consultation document, to make the courts in a judicial review application the whipping boy for failures in Government policy and whether the process of judicial review is an adequate mechanism for imposing upon Government accountability for failure to meet its legal duty under the Act. Professor Grubb: I am not sure I am fully qualified to answer the best way for a Government to bind itself, it is actually quite a complicated question, but one approach is proposed in the Bill. In some areas there are other possible questions, the Government could, for example, at least based around price rather than quantity, enter into a contract in which it promises to pay certain investors certain amounts for low carbon investments. That is another way that one could use contractual law to try and address some of these longer term questions. I do not feel qualified to answer the specific question. Q151 Mr Cox: What about Mr Edwards? Mr Edwards: On that specific question I do not feel qualified legally enough to answer it, but on the question that the Chairman posed, is it not going to be up to the Climate Committee to suggest to ministers with enabling powers that certain sectors should be covered by emissions trading and certain sectors in transport or domestically should be covered by regulation, and that it will then be up to the secretary of state to either propose a Bill or even use enabling powers to more speedily impose the goals of the Climate Committee. Q152 Mr Cox: The defect in the judicial review that has been pointed out to us by Friends of the Earth is that judicial review is a very week remedy in this area. You have a series of polycentric decisions, not ideally fitted for a judge to make a good judgment on, he is looking ahead over a period of years. Courts are notoriously reluctant in areas of policy to get involved, so Friends of the Earth suggest a pre-emptive approach where policies are announced and then subjected to a review and challenged at the stage where the policies, so to speak, are set out for the next five years, in advance of the policy's implementation. Ministers then could be required to amend the policies if the view was taken that it probably would not meet the budget. What do you think about that? Mr Edwards: Is it worth making the comparison to the Monetary Policy Committee which produces an inflation forecast, has to write a letter if the inflation target is breached, as it has been recently, and actually holds a lever on monetary policy. I do not think there is any suggestion that the Climate Committee is going to hold a lever, but there is a great deal of transparency in the approach of the inflation reporting of the Monetary Policy Committee and perhaps the Climate Committee looks a bit more like Kenneth Clarke's seven wise men that was a precursor to it. Just by having a transparent process - the Bill talks about forecasting -the Committee doing forecasting and having a transparent process that is open to public scrutiny will then put pressure on the secretary of state a priori instead of waiting until the judicial review to worry about it afterwards. Q153 Mr Williams: Professor Grubb said that the Bill is about total carbon emissions; in fact of course although there are five-year budgetary periods the main purpose is the 60 per cent reduction in annual emissions by 2050. It has been argued to us that actually the most important thing is the total amount of carbon that is produced between now and 2050 and so it is important to get the steepest reductions earlier in that period if we are going to minimise the total carbon emissions and therefore mitigate climate change. Is there anything that could go in the Bill to encourage early large reductions? Professor Grubb: I presume the interim target, the 2020 target, and presumably the setting of three budget periods ahead. Q154 Mr Williams: Have you got any view on what sort of increased targets could be put in the Bill? It is argued to us that actually this will not keep temperature increases down to 2oC. Professor Grubb: Some of these things are a matter of trade-offs between what seems possible and doable. Let us be honest, we are in a situation where the Government for several years has officially acknowledged, accepted, the severity of this problem et cetera, et cetera and still CO2 emissions are not going down. From that position a reduction of at least 26 per cent by 2020 is already a very demanding, strong change from the current apparent ability or not to get these emissions under control, and 26 to 32 per cent is a pretty steep change from what we seemed to have been able to do so far. If you are implying is that number not strong enough; that is probably a range that I would not find unreasonable. Q155 Chairman: That is quite interesting. In a sense you are telling us that it is pragmatism that should rule in the first instance. Professor Grubb: No, what I am telling you is I have seen a long history of governments setting targets and then going extremely quiet when they have not been met. Q156 Chairman: Yes, but on this occasion they cannot, can they? Professor Grubb: No, that is right, but in that case you had better make sure that the targets have implications that you have some idea how you are going to implement and understand. Q157 Chairman: I want to briefly move back to Mr Edwards and I would be grateful if you would put on the record now some remarks you made when you were telling us about how Carbon Markets work, about the opportunities for the United Kingdom purchasing carbon credits from abroad, how robust those systems were and you were indicating to us that there were, within certain agreements, limits on how much you could purchase. One of the areas of sanction is that if you miss the target you have to buy your deficit from somewhere; would you like to say a little bit about how robust the purchasing systems are and is it something which, if you like, the Government should simply regard as a fallback position, or in your judgment is it something that is going to have to be used come what may? Mr Edwards: First of all on the question of robustness and as far as we can see between now and 2012 the system for generating emission reduction credits from the clean development mechanism and joint implementation is extremely robust and policed very effectively by the United Nations. Between now and 2012 the UK is going to be one of the few European Member States that does not need to rely on these mechanisms. Quite what international law will do to scale up the effectiveness of those mechanisms after 2012 is not clear and so it is hard to say with certainty whether they will continue to be as robust if they are scaled up to cover entire sectors in developing countries, but I am pretty confident that they will be. In terms of the limits on the use of importing, effectively, offsets or credits from other countries it is an extremely useful way of transferring technology from north to south, of showing developing countries and economies in transition that we are serious about leadership. In terms of the supply of emission reduction credits it creates for the embryonic carbon market a safety valve in that there are lower costs generally for taking a tonne of CO2 out of the atmosphere in developing countries than there are in the industrialised world, but the principle of supplementarity that is currently enshrined in Kyoto and the Marrakesh Accords, whereby the use of such credits should only be supplemental to domestic emission reductions, must be carefully followed, and I know the Bill mentions this, but it would not be right for the UK's 60 per cent target to be 30 per cent the UK and 30 per cent somewhere else. I hesitate to use the word "additional" because that really does create some very demanding targets for the UK, but one of the things that the Climate Committee will want to scrutinise very carefully is the extent to which we are successfully creating a carbon price in Europe or the UK that encourages investment in low carbon technology and infrastructure and excessive importing of those credits could keep the carbon price down. It is important at the level of nation states that nation states do not rely totally on such credits, in so far as it is possible to do that in any case when demanding emission reductions are needed in the industrialised world. Q158 Chairman: You would not define in the Bill any limits, you would leave it to a matter of judgment for the countries. Mr Edwards: The Bill should certainly retain the principle of supplementarity at a minimum, in other words that the use of imported credits should only be supplemental to the successful achievement of domestic emission reductions. Q159 Sir Peter Soulsby: Has anybody tried to define what supplemental means in that context? Mr Edwards: Professor Grubb will tell you. I think that it is not defined; it has come to be defined as 50 per cent. It has come to be understood across Europe as "let us treat it as 50 per cent" because we are not going to meet our Kyoto obligations unless it is, and I think for now that is a perfectly reasonable definition. As I say, I do not think the 60 per cent target by 2050 should be achieved mostly or even largely by purchasing credits from elsewhere, but it is a very useful mechanism as a safety valve for technology transfer and for economic efficiency because it is, after all, generally cheaper to reduce emissions in developing countries. Q160 Chairman: Even if you did not have it numerically defined in the Bill, do you think that the Government has got to make a clear statement of what its policy is towards the use of credits? Mr Edwards: We would encourage that, yes. Q161 David Lepper: We have talked already about the role of the Committee on Climate Change and you, Mr Edwards, were suggesting a comparison with the Monetary Policy Committee; I just wonder if that is a very accurate comparison. The Chancellor sets the inflation target, the Monetary Policy Committee then decides what the interest rate will be in order to meet that inflation target, it makes that decision. That is not quite the same role for the Committee on Climate Change, is it, it is advisory; it is to make proposals to the Government. Mr Edwards: I would not want to take the comparison too far but I think, going back perhaps to what Professor Grubb said about seeing targets set and not being met, and everybody going quiet about it, the Climate Committee will create a process of scrutiny and transparency that will put pressure on Government to meet the targets even if the exact mechanism and the levers are different. Q162 David Lepper: I wonder if you have looked - and I address this to all three of you - at what is suggested in Schedule 1 of the Bill as to the kinds of people who will sit on the Committee on Climate Change and whether you feel that is adequate. Are all of those areas which need to be covered, are there any glaring gaps and what do you think of the fact that a knowledge of climate science comes sixth on the list of the areas of expertise to be included among the members of the Committee? Professor Grubb: So long as they are still on there; I am not sure I remember where on the original list they were, but so long as they are on there. Q163 David Lepper: You do not feel they should have been a little bit higher up than this; that does not matter so long as they are there. Professor Grubb: Yes. Q164 David Lepper: Mr Edwards, you also talked about the Committee depoliticising in your evidence. Can you explain how you see it doing that? Mr Edwards: Without wanting to overdo the comparison - which you have already suggested is not wise - with the way monetary policy is conducted I do feel here, looking at the history of inflation targeting from Paul Volcker to the European Central Bank to the wise men of Kenneth Clarke, there is a strong sense in which this Bill is going to be very valuable in taking controversial decisions out, becoming less of a party political issue and more of an issue that is scrutinised publicly and dealt with in a less political way. Professor Grubb: It was partly to the previous question, so I was just checking through the list. There is one thing that could also be considered in terms of the Committee composition, which perhaps underpinned some of the approach as well, which is slightly ironic coming from an economist, in that there are large parts of this problem that can be addressed through economics and technology and investment et cetera, there are other parts that involve public behaviour, involve public willingness to accept certain things like much higher prices, constraints on road use or travel. Therefore, that socio-political dimension it might be wise to include, because the idea that a bunch of relatively technical and business people could declare that the Government needs to do various things, which then turn out to be actually politically extraordinarily controversial, or there is simply a failure to take account of what people are or are not willing to do in terms of behavioural change, is a useful thing to consider. Q165 David Lepper: The Committee needs someone to handle spin. Professor Grubb: No, not at all, the Committee's job is nothing to do with public relations as I understand it, it is to do with advising governments on how, potentially, to get people to change to lower carbon lifestyles rather than pretending that everything comes down to price or investment, so I think that is an issue to consider and there are other areas perhaps that we do not have time to go into, but we touched in our memo on the question of the difficulty of business translating national targets to investment indicators. Q166 Mr Cox: Is there enough in the Bill that creates that institutional independence which you, Mr Edwards, spoke of and which you, Professor Grubb, mentioned right at the beginning of your remarks as being the value of this Bill, namely creating this kind of institutional certainty for industry and the country? The CBI does not think so, the CBI seems to have got the idea that the idea of Defra is that it would provide advice to the Government in response to specific questions, like a jury being tasked with a judge to decide certain issues of fact. It does not seem explicit in the Bill that it will occupy even the role of the wise men, Mr Edwards, of which you spoke, it really is a very ill-defined institution indeed and if it is meant to have that type of independence that would give genuine political cover do you really think it is sufficiently explicitly set out in the Bill? Mr Edwards: It would ideally be more explicitly set out and other things could be more explicitly set out. The Climate Committee will need to have more explicit guidance on whether it should take into account socio-political reality or international negotiations or trajectories, and I did notice that the Committee was going to have to take account of a 60 per cent target, decide whether that target was realistic in the light of international negotiations and also take account of a number of other factors: economic, social and political and it will be a tough job to do without a little bit more explicit guidance that perhaps the trajectory is the number one priority. Q167 Mr Cox: What about Professor Grubb? Professor Grubb: I would agree with that. I am sure the independence could perhaps be more fully defined than it is currently laid out. Q168 Mr Drew: If we look at the history of independent committees there is no better example of some of the tensions than CoRWM, which looked at nuclear waste. By the very nature of this body it was trying to be all-embracing to get the inherent tension within it so you could get different viewpoints represented in that body. The problem is the tensions were so great that there was a time when people were resigning with gay abandon as part of that body. Are we seriously suggesting that a committee could bring in all those different views and yet be a body that would take some tough decisions and tell Government about those tough decisions? Professor Grubb: Again, it may not fully be my area of expertise but, first, I do not think you can expect to have every possible view represented on a relatively small committee and I agree, if you try and expand it to have every conceivable view then you could end up with the kind of problems you have indicated. My slight observation is that, given the right mandate, the success and impact of a body like this unfortunately to some degree does come down to two factors, one of which is the right choice of chair who can manage a process towards some consensus without losing all of the substance, and can pull out the things that really matter and argue and defend them potentially against a slightly hostile government and, secondly, I would suggest a secretariat that is adequately resourced so that the committee can carry out its own analysis and, if necessary, challenge government analysis. Q169 Chairman: What does it need in the way of resources? Professor Grubb: It needs a secretariat that has some technical competence to do analysis. Mr Drew: Can I just say, we have the Sustainable Development Commission which actually has probably done invaluable work because it has not tried to have a high profile in the sense of making lots of exotic statements, it has just got on and done a lot of good groundwork, and where the Government has been at fault it has criticised and where it feels the Government has done some good work it has been complimentary and it has gained status because it has not tried to get into the political framework. Why do we not just give it to the Sustainable Development Commission; there is nothing more sustainable than trying to keep the planet going, why are we inventing another body? Q170 Chairman: Ask Mr Miliband that because he has drafted the Bill. Can we have a quick answer, yes or no, do we need another body? Professor Grubb: I think the mandate of the SDC does not cover the mandate that is required for this Bill, for starters, and one might argue it requires different sets of expertise in some respects. Chairman: Thank you very much. David. Q171 David Lepper: The Energy Saving Trust, in talking about the resources that the Climate Change Committee might need, talks about a secretariat, as did you. The Energy Saving Trust talks about the importance of the Office of Climate Change and the inter-departmental analysts group as being amongst those who might help to provide that support. From what you have seen so far of the work of the Office of Climate Change, for instance, or indeed the IAG, do you feel those are the right sorts of bodies to be providing that resource that is needed to the members? Professor Grubb: I am not sure whether the Office of Climate Change has yet had much time to show what it can do in terms of analytical advice - at least, not that has gone into a more public domain as yet. You can tell me exactly how long it has been in existence, but it is not long to produce that kind of outlook. Q172 David Lepper: Since about September last year, but quite what it has been doing is one of the questions that we have asked ourselves on occasions, but it is interesting that you ask yourselves the same question. Professor Grubb: That is not quite what I said. Chairman: Part of our concern is that when the NAO produced their report Emissions Projections in the 2006 climate change programme review they said, and I quote: "There is considerable inherent uncertainty in modelling the UK energy market and emissions projections" and here is this committee that is going to have to give some pretty sound comment on all of these things against a background where there is still modelling uncertainty, and it is a question of what kind of kit they need to try and bring an element of certainty into a world of uncertainty. Maybe you have not got a definitive answer on that because I am going to move on to Lynne Jones. Q173 Lynne Jones: Before I ask the questions I was supposed to ask could I just ask Mr Edwards, going back to the supplementarity thing, you said 50 per cent; what do you mean by that 50 per cent? Mr Edwards: That if an Annex 1 country under Kyoto has to reduce its emissions by eight per cent from 1990 levels, four per cent of those reductions at a minimum must be achieved domestically and no more than four per cent achieved by having the assigned amount targeted. Q174 Lynne Jones: Are you saying that 30 per cent of our CO2 reduction target - that is 50 per cent of the 60 per cent target - should be based on purchase of carbon credits? Mr Edwards: Am I saying that they should be? Q175 Lynne Jones: Yes. Mr Edwards: No, I am saying that we should be careful that that is not the case. Professor Grubb: There are, as Rupert said, different interpretations, which is one of the problems behind the concept. It has certainly also been used to say that it means that half of the effort required to achieve a given target must be done at home, and that has been otherwise defined by some others as saying you have to work out what the country's emissions might have been, and then half of the gap between that and its target could be done. There are differing meanings about what people mean. Q176 Lynne Jones: You are not saying 50 per cent so what would be a reasonable proportion? Mr Edwards: I am probably not qualified to have a view on whether the target should be 60 per cent or 80 per cent or 450 parts per million but I sense, if you want a personal opinion, that 450 parts per million looks wise and that therefore 60 per cent is a minimum, and that if you are going to do that as an industrialised country you cannot rely on achieving that through purchasing credits from overseas, but I still think that the flexible mechanisms of Kyoto are extremely valuable, for the reasons I said earlier. Lynne Jones: Turning to the secondary legislation in the Bill which gives enabling powers to set up new trading schemes, are you generally supportive of such a proposal and what characteristics would such schemes need to have to ensure that there was high carbon investment rather than low carbon investment? Q177 Chairman: Can you give us a for instance as to what one of these new schemes might look like? Professor Grubb: James or I could because we have been somewhat involved in the early stages of one of them, which is what came to be known as the energy performance commitment and certainly some of the contributing analysis that we did on that was a suggestion for effectively a cap and trade scheme, but which would be fundamentally different from the European trading scheme which applies to big industrial high emitting facilities, and this instead would be designed to set caps on the commercial sector and would operate through the company, not through the individual facilities so that, for example, a large supermarket chain would have to map its emissions right across the country and the board would then be held accountable for the total emissions and would then have to buy credits in relation to that. That is an example and actually that would include some of the carbon emissions from the electricity that it consumes, which is not how the EDS works. Q178 Chairman: Just to be certain I understand that, are you saying that somebody would set a cap on, for example, Tesco in terms of their emissions? Professor Grubb: That was the suggestion, probably following a separate line of inquiry. Q179 Chairman: Who would set the cap? Mr Wilde: Within the scheme that is being proposed the Government would set an aggregate cap on participants within the scheme, so currently it is expected that about 5000 organisations responsible for around 15 million tonnes of carbon - ten per cent of the UK's emissions - would be within the scheme, and so the government would set an aggregate cap for all participants within the scheme rather than a cap for Tesco specifically. Q180 Chairman: Just to understand, you said that a company would be accountable; how would it know what its share was? Mr Wilde: It would measure its emissions each year and there would be an aggregate cap on emissions. They would need to buy allowances in an auction at the start of the year, so basically the Government would auction all 15 million tonnes of carbon --- Q181 Lynne Jones: The proposal in the Bill is that they should be distributed free; what do you feel about that? Mr Wilde: The current proposal for the energy performance commitment is that they should be auctioned at the start of each year. Chairman: That is not what the Bill says. Q182 Lynne Jones: The current proposal for what? Mr Wilde: For the energy performance commitment specific instrument --- Q183 Lynne Jones: But that does not apply to Tesco, we are talking about new schemes here. Mr Wilde: This is a new scheme that the Government has just consulted on. Q184 Patrick Hall: That you have been working on. Mr Wilde: We worked on it about 18 months ago. It features as one option to incentivise emissions reduction in this particular sector. We sent a publication through as part of our evidence that explains the logic for this option. The Government subsequently put it in the climate change programme review as something they would like to investigate and in the energy review they made a commitment that they would introduce a new measure to reduce emissions from the large non-energy-intensive sectors by 1.2 million tonnes of carbon by 2020. This trading scheme is one of the options that they are looking at to get there. The enabling powers within the Climate Change Bill would enable the scheme that is being looked at to be put forward. The current proposal for that is that the allowances would not be distributed for free at the start of each year. Q185 Lynne Jones: Do you think it is important that the Bill should make it clear that they would be auctioned? Mr Wilde: You might have a different system for different schemes. Q186 Lynne Jones: What sort of schemes would you envisage where it would be appropriate to give permits free? Mr Wilde: I have not given it any thought. On the scheme that we have just been talking about, there is consensus for analysis that says you have a greater drive for change if there is some change of moneys. Professor Grubb: On the question that is troubling you, we analysed and suggested 18 months ago unambiguous recommendation for 100 per cent auctioning in this sector and I have seen nothing that would change that view from ourselves ultimately. Patrick Hall: What happens at the end of the year? You purchase credits at the beginning of the year. Where do you get something back? Q187 Lynne Jones: You sell them to other people if you reduce your energy. Mr Wilde: The logic would be at the start of the year I am sitting here as a major company. I predict what I am going to emit over the course of the year. I buy that many allowances in the auction at the start of the year. That gives me an incentive to reduce my emissions through the year and I will sell any surplus to someone else who does not manage to reduce. The suggestion that the government is currently looking at is that this needs to be financially neutral for firms. It is not necessarily about creating a new financial burden for them. The suggestion is that at the end of the year companies surrender allowances for an equivalent to what they have emitted and then the moneys received through the auction will be recycled back to participants. It is revenue neutral. Q188 Patrick Hall: Overall? Professor Grubb: Correct. Q189 Lynne Jones: The first question about are there any other characteristics of such a scheme which will maximise the carbon savings that you would care to comment on? Professor Grubb: I am not sure which scheme we are talking about here but some further attention to creating a bit more confidence about what the future cost of carbon might be under some of these schemes would help business investment in carbon technologies. Q190 Chairman: Mr Edwards told us informally it is very difficult in quite a volatile market to make that kind of forward prediction. Professor Grubb: We have made some suggestions as to how the government could consider ways of underpinning a minimum price level. That is not impossible. Mr Edwards: That was a comment I made informally about perhaps having a floor price in auctions. Q191 Chairman: These are more about the design of the scheme that the government might introduce because it has powers in the Bill so to do. Perhaps the message I am getting from you is that it is better to allow the scheme to be designed in the way the scheme is rather than try and design it in the Bill. Professor Grubb: Beyond a certain point that has to be the case. There is presumably a limit to the level of detail which a Bill has. Q192 Chairman: For example, there is nothing in the Bill at the moment that says any scheme that is produced shall have in it a mechanism to put a floor price for carbon in. Professor Grubb: It is an option. Q193 Chairman: One of the questions that we asked was what was missing from this Bill. Some witnesses have chosen to give ideas and suggestions; some have ducked the issue. Is there a missing element in scheme design that ought to be there? Do not feel compelled to say yes; you might say no, just leave it to the scheme. Professor Grubb: I do not feel compelled to say yes because in our own evidence we said yes, there are things potentially missing. The issue we just touched on is one that at some point should be considered, whether or not in this Bill or other issues, but it is very hard for business to translate from a national aggregate target to say, "What will that mean for my investment?" because price tends to be what a business can deal with in deciding whether it is worth investing in low carbon technology. It is very hard for a business to translate from a national target 15 years ahead to say, "What is that going to mean in terms of my investment?" Hence my reference to some kind of stronger confidence around carbon price in the sectors where that is the thing that matters. Q194 Lynne Jones: Do we have the necessary mechanisms to ensure accounting for carbon emissions in these schemes and even in the totality in terms of the carbon offsetting process? Professor Grubb: Certainly for fossil fuel carbon, yes. For some of the other gases, it may be more difficult. I am not sure the exact status of monitorability in some of the sectors which are not core or fossil fuel related. Q195 Lynne Jones: In terms of the enabling powers, is it appropriate that there is so much emphasis on emissions trading and market mechanisms rather than other policy instruments to reduce carbon? Professor Grubb: For at least half of the economy things to do with emissions trading and carbon pricing are very important. There are other parts of the economy where they are missing the point. If you think you are going to solve buildings related emissions through a carbon price or even personal transport, I think you are making a big mistake. Q196 Lynne Jones: Are there any other inclusions in the Bill? You have mentioned the idea of giving the Carbon Committee further terms of reference. Would that cover those concerns? Mr Wilde: There is a portfolio of policy instruments required to overcome the barriers and neutralise the drivers for improved energy efficiency and adoption of low carbon technologies. Things like regulation, product standards, better information, support for innovation can happen outside the Bill. It says explicitly within the Bill that the UK has the power to set building regulations through EU product regulation standards. The Climate Change Bill is trying to accelerate their ability to put in ---- Q197 Lynne Jones: For example on the code for sustainable homes, there is a view that the building industry has had a disproportionate influence on the government in terms of the standards, the rate at which higher standards are being brought in. Would it be appropriate for the Carbon Committee to take an independent viewpoint of some of these other developments? Professor Grubb: I do not think so. Q198 Lynne Jones: Earlier, Professor Grubb, you said that national total emissions is the right point to start. We are setting the 60 per cent target on national emissions and excluding our share of international aviation and shipping. How do you feel about that? Should aviation and shipping be included in the Bill and what mechanisms could just include the emissions anyway, because we already understand about the amount of fuel that is consumed? There is already reporting on that. As a point of principle, should aviation be included? What mechanisms could be introduced to encourage a reduction in aviation emissions? Professor Grubb: It is not really my area. Everyone talks about aviation but our own work at the Carbon Trust suggests that international marine transport is just as big an issue. Aviation needs to be included in the European Emissions Trading Scheme so it will fall under some kind of cap by 2011, when I think it is due to come in. It is unlikely to provide a whole solution to aviation. On the rest I would be reluctant to take a judgment because I do not know exactly how much is domestic versus international and the jurisdictional development, if you like, around international bunker fuels, to use the general term. We have to be absolutely sure it is not left out of the equation so if it is not in the national budget total I would want to know where it was accounted for. Q199 Lynne Jones: If you do not include it we are set to increase our emissions for a number of years hence until at least 2011/12. Professor Grubb: Absolutely. Q200 Lynne Jones: Should it be included at least in the overall assessment of our total emissions before applying the 60 per cent reduction target? Professor Grubb: If you mean should the committee's remit exclude anything of international bunker fuels, I would not see any reason why it should, if that is a separate question from how the target is defined in instruments. Q201 Patrick Hall: Do you mean it should not? Professor Grubb: I would have thought the committee has to consider any contribution that is making the climate change problem worse, which would obviously include international bunker fuels. Q202 Lynne Jones: It does not at the moment. Only national aviation is included in our total carbon budget. Professor Grubb: There may be reasons to define the carbon budget in terms of domestic emissions over which the UK has jurisdictional control. Irrespective of how the carbon budget is defined, the committee surely should be allowed to comment on the state of international aviation and marine transport. Q203 Lynne Jones: Would you care to comment, Mr Edwards? Mr Edwards: I do not feel qualified to judge the complexities of how the Climate Committee's remit would interact with international law on aviation issues. Chairman: Thank you very much. You have given us a lot of very interesting perspectives both in your comments before the Committee this afternoon and in your written evidence. Mr Edwards, may we put on record our sincere appreciation for your heroic efforts to teach us something about how the price of carbon is determined and apologise that we may not have been the fastest learning students in the class. I think it is a subject that we may well return to but thank you very much for your contribution and efforts in that respect. Memoranda submitted by the CBI and EEF Examination of Witnesses Witnesses: Mr Michael Roberts, Director of Business Environment, and Ms Gillian Simmonds, Senior Policy Adviser, Business Environment, Confederation of British Industry; Mr Gareth Stace, Head of Environmental Affairs, and Mr Roger Salomone, Energy Adviser, EEF, the Manufacturers' Association, gave evidence. Q204 Chairman: We welcome to the Committee our second set of witnesses. For the record, representing the Confederation of British Industries, we have Mr Michael Roberts, the director of business environment, and Gillian Simmonds, senior policy adviser of business environment. From the Engineers' Employers' Federation, we have Gareth Stace, who is the head of environmental affairs and Roger Salomone, who is their energy adviser. You might have gathered from our line of questioning with our previous witnesses that we were interested at the outset in establishing what your thoughts were on the validity of the target of greenhouse gas reduction which the government wishes to build into the Bill, how realistic it is, particularly from a business point of view, and whether we need a Bill as a mechanism to achieve it. Is it something that you support? Mr Roberts, do you want to kick off for the CBI on that? Mr Roberts: That is a rich question with a lot of angles to it. Starting from the last part of your question, we support the initiative to bring forward the Bill and to create a degree of certainty for the business community, both over the long term and the medium term, with regard to the pace and direction of travel in carbon reduction because that helps businesses make rational investment decisions in low carbon options. With regard to the nature of the targets, a number of issues from our perspective need to be resolved. First, the way in which the emissions are categorised. You suggested in your introductory remarks that it was aimed at reducing greenhouse gas emissions. It is specifically CO2 related. In our judgment that potentially could cause some difficulties. For example, some of the international commitments are expressed in greenhouse gas emission terms. There is a potential issue of lack of synergy between what we do here in the UK and what we do on the international stage. The second issue is with regard to the scale of the targets, however they are expressed. We have supported for some time the government's ambition to move towards a 60 per cent reduction in CO2 by 2050. We recognise the need to move at a pace in the medium term. We have supported the idea of an interim target. Our observation that the proposed target expresses a range of 26 to 32 per cent by 2020 is an extremely challenging one and would require measures beyond those which are currently envisaged in the government's climate change programme and indeed in the measures which are envisaged under the current energy policy review. Whilst we welcome the need to move quickly in the period up to 2020, we believe that the target as currently set will be challenging for business and for society as a whole. Q205 Chairman: In your evidence you express the concern that there might be some lack of fit between the domestic agenda and the European Union target of a reduction of greenhouse gases of 20 per cent by 2020. Is that a pitch for having it at 20 per cent as an interim target or simply saying, "I accept we have to do better but it is still challenging"? Mr Roberts: We do not necessarily suggest that the UK target has to be 20 per cent as well. The issue of fit is first round whether it is greenhouse gases or CO2 that we are talking about. The second is that the EU's target of a 20 per cent reduction by 2020 in some way has to be distributed or shared as a responsibility both between Member States and between sectors of the European economy. How that burden sharing, to use the term of art, relates to what goes on in the UK and then within the UK between different sectors of the economy in the UK is the bit that is very unclear. Given that uncertainty, we naturally have some concerns, for example, that the UK may be committing itself to a degree of effort which is laudable but in excess of what perhaps some of our European partners are committed to. We would like to see them meeting the same degree of commitment that we would be committing to in the UK. Q206 Chairman: Mr Stace, do you want to comment? Mr Stace: We would agree with the CBI in terms of welcoming the Bill, in terms of certainty for our members, in terms of what will be required of them over the long term. We welcome the certainty of having a long term target of 60 per cent by 2050. We also welcome the 15 year certainty of three budgetary periods set in one go. A five year budgetary period is also welcomed by our members. In terms of the target of 60 per cent, we see it as something that needs to be achieved. However, we believe that the target could be 70 per cent, 80 per cent or even 50 per cent in terms of what we will learn in the future of what is required and what can be achieved without significantly damaging the UK economy. You have a 60 per cent target and, yes, that should be aimed at but in terms of long term forecasting and understanding what will happen in 2030 a 60 per cent target becomes more of an aspiration because in 2030 we will have a much better idea of what we really need to do, what we really can do and what has been done. In my mind the 60 per cent is not absolutely set in stone. Q207 Chairman: In paragraph eight of your evidence you mention the need to perhaps review it. The committee has a role in reviewing these matters. Is that not a question of how successful you might be in lobbying them about the world as you see it, as to whether they recommend targets to go up or down? The Committee suspended from 5.10pm to 5.26pm for a division in the House Mr Salomone: We refer to something called an economic trigger, the idea that you can potentially review and revise targets based on the economic outturn of events. The reason for that goes back to the target. We very much welcome having a statutory target. Business and society in general do need some kind of long term framework within which to plan our emissions reductions. That is good progress. However, in terms of the validity of the 60 per cent, to be brutally honest, we do not feel that we are in a position to say whether 60 or 65 or 55 per cent is the correct target. There is a lot of uncertainty over what is going to be technically feasible or economically viable over 40 or 45 years. 60 per cent would seem reasonable. It is grounded in quite a well received report, the Royal Commission on Environmental Pollution Report, and it represents a huge transformation of our economy to reduce emissions by 60 per cent, especially probably a growing economy. Hopefully, there will be some kind of economic growth between now and then. I do not think we should underestimate the magnitude of the change to 60 per cent. Q208 Chairman: 60 is a big number but one is a smaller number. It represents a one per cent reduction each year for effectively 50 years. Mr Salomone: It represents a very significant decarbonisation, for example, of electricity supply. There is not a single country in the world that has 75 per cent of its electricity supplied by non-carbon sources. We are talking about major changes to the economy over that time. Q209 Chairman: I would not dispute that. Mr Salomone: Investment cycles you cannot do on a year to year basis either. Investing in industrial plants or power stations you cannot do on a year to year basis. Given we think it is a reasonable target, it might transpire that 60 per cent is not challenging enough or too challenging, so we very much welcome the flexibility provided by these review clauses, so we can open up the validity of this target based on changes in international policy. You can imagine the kind of framework where there is a successor to it or not or changes in climate science. We also think, if you are going to retain control over the costs of climate change policy or indeed if you are going to realise that it transpires that climate change policy is a lot easier than we thought; the costs are a lot lower, you might want to exploit some opportunities and make the target more challenging. There should be some way of opening up the targets on economic grounds so that if the economics of climate change substantially there is sufficient to allow the Secretary of State to review those. Q210 Sir Peter Soulsby: Does it not rather blow the credibility of the whole thing if you say at the outset, "Yes, these are targets but they are not really targets; they are just aspirations"? I think that was the phrase used earlier on. They could be reviewed in all sorts of different circumstances. Mr Salomone: I do not think we are talking about all sorts of circumstances but maybe just three circumstances on economic grounds, on science grounds and on development policy. You obviously want it drafted quite tightly and it would still be something exercised by the Secretary of State and then go to Parliament to get a vote. I do not think it would be a trivial exercise. On the other hand, I do not think we should necessarily be putting a pace on it for 50 years where we do not know the costs. We do not know whether it is going to be substantially easy to achieve 55 to 60 per cent. We need flexibility in there. Q211 Sir Peter Soulsby: Are you suggesting that it is possible to define quite clearly what the triggers would be to permit such a revision of the targets? Mr Salomone: There could be one in there on economic circumstances that would be comparable to the ones in there already on, say, climate change science, so a significant change of development in the economics of climate change. Q212 Mr Rogerson: You said there were three issues you had looked at but they are all pretty broad in the sense of economic grounds. Economic grounds could cover all sorts of things. Are you talking about a crisis for the economy and industry is going into huge decline? Mr Salomone: Bear in mind two of them are already in there and drafted reasonably broadly, as you mentioned. You are not going to be able to draft something that is going to be so specific it will cover every single eventuality. For example, an obvious one is that technological development is either a lot faster and a lot more successful, so abatement opportunities are much broader and much cheaper than you thought, or the converse. We hear a lot about carbon capture and storage. When that comes on stream and is commercially deployed in the next 10 or 15 years, it might be that it is not for the next 20 or 30 years. It is really those areas where the costs of climate change and abatement turn out to be substantially different than we think they are now. Mr Stace: Both higher and lower, so you could increase the target or reduce the target. I am not just talking about relaxing the target here. Q213 Patrick Hall: The science now seems, as it has been described to us, is that 60 per cent is not ambitious enough but you are building into your approach to this - certainly EEF right from the start - that 60 may be over-ambitious. Therefore, one may end up looking to achieve less and that does not seem to fit in at all with the reality as it is unfolding. You may be reflecting your members' concerns here, which is fair enough but this goes beyond that. Could I park that and ask both of you: in terms of cost, of course there is a cost of dealing with climate change but there is a cost of not dealing with climate change. That is what Stern makes absolutely clear. If you are going to talk about the cost to your members or to industry of taking measures, surely you have to put that in the context of some sensible analysis of the costs of not doing anything here and then you look at the balance there? I think your evidence from EEF does not seem to do that. Mr Stace: In terms of what we are saying, in terms of the economic trigger, the economic trigger may not change the 2050 target. It may change the interim targets in between that. If you assume the cost of abatement now as being very high but you could see by 2020 that the cost of abatement drops and you can make huge savings there in terms of CO2 reductions, and you can see that the current targets are hurting the economy significantly, you might want to change that target at the beginning to allow for further reductions later on, where they can be made more cheaply. Q214 Patrick Hall: That may well end up being the case for pragmatic reasons. However, what has been made clear to us thus far is that a lump of carbon in the atmosphere lasts for 100 years or so before it is washed out. The more you delay tackling it, the more it is going to be around and the more the temperature will rise, which will then trigger further costs. It is not an easy equation but to suggest that it is very difficult now; therefore let's put it off - I am not saying you are necessarily advocating that but you are saying that might be a possibility - for another 10, 15, 20 years and it might somehow be cheaper because of technological change, it is not as simple as that because the more you have carbon hanging around the more there is going to be consequential effects and costs. Is that not a fair point? Mr Stace: What we are also saying is that you might have sectors of the economy that have very limited abatement opportunities, almost at whatever cost other than buying in credits. In terms of technological breakthroughs, that is what you could almost be waiting for in order to achieve those targets for certain sectors. Q215 Patrick Hall: You are more likely to achieve these breakthroughs if there is some pressure to work on it now rather than saying that it may be okay and something will be delivered in 20 years' time. Surely we need to have the political will now? Mr Salomone: For me, you used a very good example earlier about why we might need an economic trigger in terms of the flip side where you realise that the economic consequences of climate change and the damage it can do to the economy are a lot higher and more significant. There may be a case to revise the target upwards. We are trying to say it would be something that would work both ways. We are not omniscient and we do not know necessarily what is going to happen over the next 45 years and we need something to be exercised with caution by the Secretary of State and something that would go to a parliamentary vote. Chairman: It is an interesting observation, is it not, that for example somebody who is in the electricity generating business has by definition, because of the lifetime of the asset, to make a 30 or 40 year decision? It is not incompatible with the kinds of timescales that are being discussed in terms of target setting. Q216 Lynne Jones: I thought you wanted some certainty that if you invested in carbon abatement measures you would reap the benefits. Surely if you have it so flexible that certainty is not there. It does worry me that British industry seems to be looking entirely negatively at this rather than at climate change being an opportunity to encourage the development of these technologies which we do need. The longer you put that off, as Patrick has said, the less likely you will get that investment. What kind of scenario are you painting? What economic trigger are you thinking of? Mr Salomone: I have mentioned a couple. One is the pace and effectiveness of technology change. I probably would not feel competent to say exactly how costly and effective carbon capture and storage is now or 15 years ahead. It is still in development, let alone deployed commercially. There need to be some grounds to reopen the targets in those kinds of areas. Q217 Lynne Jones: We now have 50,000 people employed in the photovoltaic industry as a result of the measures that the government has taken. If we are ahead on environmental technology, it would be to the benefit of our economy, not the reverse. Mr Salomone: We would agree with you. A lot of our members are at the high technology end of manufacturing engineering. There are all sorts of opportunities for climate change but the main issue we see is that we want to retain some kind of control. We do not see review clauses being used in a trivial manner frequently but if there are major developments that we miss or if the pace technology progresses is faster than we thought, if the impacts of climate change are potentially worse or maybe not as bad as we thought, there should be grounds to review those targets. Q218 Lynne Jones: We have to take serious measures on this issue and we are going to need a hell of an amount of political will. If at the very start you are saying we could relax these targets, I would suggest to you that that political will will not be delivered. Mr Roberts: Can I pick up on your point about business being negative? Q219 Chairman: You have had a business change task force, have you not? Mr Roberts: Climate change. To pick up on your point, as I mentioned before, we have supported the 60 per cent target and the neutral interim target with some bite to it for a couple of years now. You would be hard pressed to find many other national business organisations in other countries committing to the scale of change that the UK business community is committing to. Pretty much every week you are seeing major companies in this country, not just in the retail sector but in other parts of the business community, committing to make carbon reductions which they are not required to do under the law. Certainly there is a variability of view within the business community and there are going to be some players, particularly but not exclusively energy intensive users, who face real challenges in delivering the sort of cuts that are needed. Frankly, it is not accurate to say the business community in this country is unable to deal with this. If anything, we have to have some sophisticated views in the global business community on this agenda. Q220 Chairman: Tell us about your climate change task force. For example, have they come to any views about the trajectory towards achieving the target that is stated in the Bill? You might, in answering that, just give us your views. The government has set a series of three five year targets within the Bill. Are you content with that? Mr Roberts: The task force we set up in January is still in the middle of its work. We are not due to report until later in the year. Our focus is not purely and simply the issue of the targets that are in the Bill or indeed how we meet them. To try and answer your question, we take as a starting point the Stern report and that gives a pretty strong indication about the scale and pace of change that we need to achieve, not just in the longer term but in particular Stern says the next 10 to 20 years for the global community are absolutely fundamental and that applies to the UK as well. As a task force, we are particularly focused on what it is that the British business community can do within that timescale to put us onto the longer term trajectory. The initial findings are that there are significant opportunities in the UK economy to deliver substantial carbon reductions, some which are at no net cost - it is about improving energy efficiency in the home and at business - some of it does come at a cost and the issue is how do we make sure that that cost is as manageable as possible. We will not be reporting on our findings until later on in the year. Q221 Chairman: You cannot give us a view about the five yearly budget target that the government has set? Is that a good thing or a bad thing? Mr Roberts: First of all, in terms of the interim which the five year budgets are taking us towards, we have said that whilst we need a challenging target this is a particularly challenging target, the one that is specified. At the moment, it is not obvious that there are sufficient measures in the government's programme to take us towards that. The idea of having five yearly budgets over a 15 year period in aggregate is something that we very much support because we think that keeps the overall effort focused on delivering achievement of the interim target. Ms Simmonds: The five year budget is something we support. Our focus is more on the interim target rather than the longer term target. We think the key area for the business community is about ---- Q222 Chairman: Is 26 to 32 the right number? Ms Simmonds: We think it is a challenging target. As we have said in our submission, the issue is about how that fits into the European framework. It is about making sure that the target is expressed in terms which enable us to use measures that are at our disposal within the European context, many of which are measures around making reductions within the UK that come from Europe. We need that certainty as to how we are going to fit in with that broader picture. That is of key concern to us. In terms of whether it is 26 or 32 per cent, there is some concern that we might be showing our hand a little too soon in terms of the negotiations that are taking place in Europe and in terms of how we fit in within that structure. Q223 Patrick Hall: Is there not a danger that we end up allowing the slowest to set the pace? We are almost saying that we gold plate everything in Britain and we are better than everybody else in the European Union at doing things. There is a danger of adopting that position with regard to this issue that we are discussing. Surely we must not allow the slowest country or sector to set the pace. One of the benefits of this proposed legislation is that Britain is at least saying, "Yes, we are going to do what we think is necessary to fulfil our share, irrespective of what others do. We hope the others will do it, especially in the European Union", but do I detect that you are saying that we cannot deliver our share unless others do it first or do it at the same time? Mr Roberts: Our position is a little bit different to what you have suggested. Our view is that certainly there is an opportunity by indicating our degree of ambition to bring others to share that ambition. That is what we are trying to achieve. What we are not trying to achieve is to say that, simply because we do not know yet what the others are going to do, there should somehow be a race to the bottom by us rowing back. The idea is that, precisely by showing that we want to be ambitious, we get others to meet that ambition too. The experience of the second phase of allocation under the Emissions Trading Scheme has indicated that that can work as an approach. The UK was one of the first to come out with its ambitions. Other Member States were less ambitious. The Commission said to other Member States, "You have to raise your game." The end result was a not unreasonable one. It is however a risky strategy because that does not always work and experience in the first national allocation plan process was an example of where that sort of approach did not work. By all means let us be ambitious in what we want to achieve, but let us use that as an opportunity to lever the others to come to the table with the same ambition. Q224 Chairman: That is a sort of first mover advantage, is it? Mr Roberts: I am not sure the phrase quite operates in this sense but I understand the idea. It is really about saying that as a country, as a business community, we understand the seriousness of the issue. We need to act. We need to act now and we need to act with some pace. This is what we believe is reasonable. We need to see that sort of commitment being matched in other countries. Q225 Chairman: In your evidence you are talking about the interaction between the European Union proposals and the UK proposal and you said that emissions reductions to be achieved by each of these sectors will be implemented on the basis of a sectoral methodology defined by the European Commission and applied uniformly across all companies concerned in a given sector. Do you have reservations about that approach? Ms Simmonds: About it being a sectoral approach? Q226 Chairman: Yes. Ms Simmonds: No. There is an emerging consensus within the business community that a sectoral approach is possibly a positive way of addressing competitiveness concerns for industry. Obviously there are always risks associated with potentially the way it is phrased in this, which is suggesting that there is a proposal on the table. It is not necessarily endorsing it in its entirety from the point of view of the CBI. There are some risks obviously associated with it being a strategy where we may pass over to Europe the control around setting sectoral targets. There are also other ways in which we could look at it, where that control is shared between Europe and the nation states. As a sectoral approach itself, I think it is something that the business community is very interested in pursuing. Q227 Chairman: The United Kingdom government has powers in the Bill to introduce trading schemes. I suppose there must be an interaction between what happens in Europe and what gets left out of that, as to where the government might apply its own trading schemes. Ms Simmonds: I think that is one of the areas in terms of the interim targets that we are concerned about. We have interest in seeing that it is taken up within the Bill or within the considerations. If part of the target is not within the UK, the UK's target is able to reflect that in terms of what the European Emissions Trading Scheme might affect. Q228 Chairman: What I am driving at is: does the Bill have to be modified in some way to take into account any possible misfits between what might happen at a European level and what might happen at a national level? I think I get the sense that, from the CBI standpoint, within Europe you would all like everybody to be travelling by the same route to achieve the European position. It might be that we in the United Kingdom go a bit further. In the methodology you want an equivalent so that we are not left behind in competitive terms. Have I understood that correctly? Mr Roberts: We have a situation which is evolving but as of today we have a European wide scheme, an emissions trading scheme which covers process industries and power generation, that across Europe and within the UK covers installations that are responsible for approximately half of the emissions from the economy. To the extent that a European scheme continues - and we do want to see European wide and in the future global trading schemes - and operates at a pan-national level we think there may be scope for looking, for example, at a sector based approach to establishing the allocation of carbon to certain parts of the economy. For those bits that are not covered by pan-national schemes, there may be opportunity for a national approach. In the previous session of evidence you had a discussion about the energy performance commitment, which is a nationally originated idea and which will apply not to energy intensive sectors but to energy extensive sectors such as the retail community. In principle, we do not have a problem with the operation of both the pan-European and the national sets of approaches. Where we have a concern - and it was expressed in our evidence - is that in providing enabling powers to the government which are focused on trading our feeling is that inevitably that will encourage the government to look at measures that will apply particularly to the business community in delivering UK emission reductions, since trading tends to work well with businesses rather than the individual consumer. What we would like to ensure is that that does not skew the balance of effort unfairly away from the whole of society in delivering emissions reduction and put it unfairly on one part of society which is the business community. Q229 Chairman: Try and give us a steer. I too have grappled with how your share out the target over these periods. How do I know what Mr Jack has to do to make his contribution towards it, or is it all going to be done for me by those who provide my energy? I am in a bit of a dilemma in that respect. I think you are saying that you do not want all the eggs to be put into the business basket in terms of achieving these targets. Is that right? Mr Roberts: We would argue that it is not economically the most efficient way of doing it. Q230 Chairman: What would you argue is the most economically efficient way of doing it? Mr Roberts: If you look across the economy at the range of opportunities which exists, there will certainly be many things that the business community can and should do and in fact has been doing under the Emissions Trading Scheme; but there are things that individual consumers can do in the way that they exercise their choice to travel, in the way that they heat and light their homes and the appliances they use. Some of these areas also carry with them a role for the business community. I am sure you will have heard discussions about the potential for energy service companies to provide a different offering to consumers which is not about kilowatt hours or energy but the end outcome of that energy which is heat and light, which could lead to a much more efficient way of people meeting their needs for comfort in the home. There is a whole range of opportunities and they rest not just with business but with individuals as well. The way through this ultimately is the way in which the government designs an overall programme of activity to deliver carbon reduction. Some of that will rest with measures which will rely on business but the programme - as indeed it already does - has actions which are focused on transport and the domestic consumer. From our point of view, there is a risk in trying to in some way set targets for each of these component parts of the economy because there is a risk that you then lose the flexibility, particularly as you go from five year budget to five year budget to five year budget, to put more emphasis on one set of measures than the other. We think a programme which indicates the broad scale of effort that it is intended to deliver from either business, the consumer or the transport user is the way in which we will start to provide you with a bit more granularity about who is going to be responsible for delivering what. Q231 Mr Rogerson: Do you think it is legitimate for government to say, "These are particular areas of industry we do not necessarily want to incentivise within the economy in order to meet our targets", rather than just saying that there are blanket targets for the whole of society to meet or for the whole of the business sector to meet? It is difficult because they all interact anyway but the government may come to the conclusion that these are very energy intensive industries and we want to see the UK economy concentrating in other areas. How do you cope with that sort of thing? Mr Roberts: From our point of view, we would be keen to ensure that the government, in looking at the contribution that can be made from each sector of the economy, takes as its starting point the principle that we should be looking for the most economically efficient basket of measures. The most economically efficient set of measures in the first instance is around energy efficiency because it is a net positive benefit to the economy. There are opportunities certainly within the business community, both the service sector and indeed in manufacturing, but there are also significant opportunities amongst domestic consumers to be much more efficient in the way that they use energy in the home. I am using this as an example to make the point about the principle, which is: look across the range of opportunities out there, focus in the first instance on the most economically efficient and work your way through towards the end point. That would suggest a particular emphasis on business, whether it is industry, manufacturing, services or whatever, and indeed on other parts which are non-business. In doing all of that, the other thing the government should be looking for is to try and make sure that, in perhaps looking to heavy industry to deliver a certain amount, it does not adopt measures which impose too great a cost which is not imposed upon their overseas rivals. It is not just an economic issue; there is an environmental reason for it because you do not want to export the industrial activity from the UK where there is a reasonably strong enforcement regime to parts of the world where perhaps the enforcement regime or the commitments on business are less stringent, so you end up with an environmentally less beneficial option. Q232 Chairman: The only sanction that so far has been suggested to the Committee as a workable way in which the government could be disciplined externally for not achieving its target is judicial review. I am wondering what your own thoughts might be on sanctions if the government does not hit its targets. Mr Stace: In terms of sanctions and the judicial review, they have come a long time after the time when the targets have not been met currently within the Bill. In terms of the Secretary of State being called to account, that would be quite a considerable pressure on the Secretary of State and on the Committee on Climate Change in terms of having to report annually to Parliament. There is a great deal of pressure there for the Secretary of State and if the Secretary of State does not meet the targets for whatever reason he would be fully exposed to that. We feel that we would not desperately want to see any further measures beyond judicial review within the Bill. Mr Roberts: As with previous witnesses, this is not an area where we can claim particular expertise or knowledge. Q233 Chairman: Let me put it this way: many of your members enter into binding performance contracts with their customers and if they do not achieve what the customer wants there can quite easily be a financial penalty clause. Their balance sheet feels the pain if the company does not perform in accordance with what it has agreed to. At the moment, the only thing that seems to be around is a rather large legal bill and governments take these things - I will not say every week - but they are not unused to being judicially reviewed. The Secretary of State wanders along to the House of Commons and says, "I am awfully sorry. We have missed the target this year and there were some extenuating circumstances. I hope everybody will understand and of course we will take what the Climate Change Committee says about changing the targets and adjusting things in the future. We did our very best. Sorry about that." Is that sufficient or should the government be compelled to make up the deficit by purchasing credits abroad, for example, or doing something that causes a bit of pain? Mr Roberts: To underline your point, there is an asymmetry in the sanction regime in that, whilst there is a proposal for government to be subject to judicial review in the event of non-compliance with the target, in the case of one of the current flagship policies to deliver on the target - the Emissions Trading Scheme which applies to business - there are real financial penalties in the event of non-compliance. In the case of the government however it is difficult to see how exactly the government would impose upon itself some sort of financial penalty. I suppose in addition to judicial review, at the end of the day, there is the political pressure that will come upon government through, for example, the annual process of reporting. To the extent that government is not compliant, I am sure you and your colleagues will do a sterling job in calling government to account. Particularly for the government that has brought forward this Bill, which sets its store by leadership in this agenda, to be shown to be failing in some way through its programme of measures to deliver on the target will be a pretty strong sanction - admittedly not a direct, financial one but a very strong political one. Q234 Lynne Jones: You said earlier that the programme was not in place to achieve the interim targets. Already, unless the government brings forward further policy instruments, they are destined to fail. Are you happy that, once the Bill is passed, they will suddenly come up with all these new policy instruments? Should there not be some process whereby the committee can point out that they are not going to meet their targets in advance if they do not have the necessary policy instruments, a judicially reviewable prior to the event rather than after the event? Mr Roberts: The Climate Change Committee will have an early job to do in highlighting the extent to which the existing programme of measures will take us towards whatever the interim target is on the face of the Bill. I would point out one of our earlier concerns about what the consequence might be of a process which indicates that somehow we are not going to be on track. Inevitably, government will look to the things that might bring it back on track. As I suggested before, the fact that the Bill has enabling powers around trading brings with it a potential risk - it may not materialise - that the government will look to pull levers to get it back on track which the Bill explicitly pulls it in the direction of: for example, trading, and that would tend to mean a bigger focus on the business community rather than the rest of society. It is important that early clarity is secured in terms of how we deliver on our target but in saying that we put in a caveat that that should not be done in a way which in some way imbalances the degree of effort across the economy in the way that I was talking about earlier. Q235 Lynne Jones: You heard the discussion earlier about the use of carbon credits. The EEF has argued that there should be unlimited use so long as they are use and have quality. So long as they pass certain quality specifications, there should be unlimited application. How do you justify that and does the CBI agree with that position? Mr Stace: As we said in our submission, the most important thing here is that we independently verify those emissions, that they really have taken out CO2 from the atmosphere or stopped CO2 getting into the atmosphere. That verification needs to be approved by the Clean Development Mechanism executive board. In terms of unlimited use of credits to meet the targets, what we are looking for here is to meet those targets, to reduce emissions, at reasonable cost. We have CO2, a global gas, global warming, a global issue. We seek global solutions for a global problem so wherever the emissions reductions are made within the world they are still contributing to tackling the problem. If those reductions can be made more cheaply elsewhere and they are quantifiable and can be verified, then those are the reductions that we should be looking to use in addition to the domestic reductions that we and our members are making. In terms of looking at reductions, from 1990 to 2005 we have seen a reduction in terms of industrial emissions but we have seen an increase in domestic and transport emissions. Since 2001, many of our members have been part of climate change agreements where they have been subject to targets which are, in Defra's words, "effective saving measures." Reductions are being made domestically but ---- Q236 Lynne Jones: With the threat of the climate change levy though. Mr Stace: If they do not meet those targets, they pay the levy. Q237 Lynne Jones: The Chancellor has not said you will not have to pay the climate change levy if you invest overseas, has he? Mr Salomone: I do not know whether this was misleading in our paper. In general, emission reductions will take place wherever they are most cost effective. In the Bill right now it is for the Committee on Climate Change to advise government on where the balance should lie between overseas and domestic emission reductions and that is something we very much support. We should not necessarily hard wire in a percentage so that that is the absolute limit on how much you can do overseas. Somewhere, judgment has to be exercised. If it emerges that there are much cheaper domestic options or vice versa, we should always be flexible to that. A decision will need to be taken by the government in consultation with the Climate Change Committee. Q238 Lynne Jones: What do you think about the suggestion that there should be a floor on the price of carbon, because one of the consequences of allowing unlimited investment overseas is that the price can be much cheaper to do that, which means that we will not, in developing the technologies, be investing here. At the end of the day we need to reduce our CO2 emissions by UK plc, and we need to reduce the increase in emissions associated with development overseas. Mr Salomone: We are not saying there should not be any reductions by UK plc at all. There is a judgment to be made as to where it is done. I do not necessarily think that if there is a huge use of, say, clean development mechanisms there would be no cost to it because demand would go up and the price of the credits associated with those schemes would also potentially go up as well. Mr Stace: It would be very short-sighted of businesses not to be continuing to reduce their emissions. One of our very largest members, a multi-national company, this year has made a commitment to reduce its emissions from 2002 to 2050 by 50 per cent. There is no legal requirement to do that. They have taken the step to do that because they believe it is ---- Q239 Lynne Jones: They are the exception. There was an OECD report in The Financial Times this week. They surveyed business and by and large businesses are not taking these actions unless they are in some way forced to do so by government. That was a clear message. In some respects you are right. We are ahead of this because we have the climate change levy and so on. Some may take these measures voluntarily but the evidence is that they do not unless there is some mechanism for ensuring they do. Mr Stace: We have seen a huge turn around, pre and post Stern, with business in the last six months with members in terms of their attitude to the measures they are or will be taking in the future in addition to the ones they have taken in the past. Q240 Lynne Jones: What about the CBI's view on this? Mr Roberts: On your point about purchasing international credits? Q241 Lynne Jones: And the floor on the price of carbon. Mr Roberts: On the point of buying overseas emission reductions, our view is fairly straightforward, which is that the approach in the UK should be consistent with the approach that is taken internationally. First of all, there is the principle of supplementarity which applies here. In other words, the delivery against our own targets should not be exclusively through purchasing overseas credits. It has to be in addition to domestic action. There is a convention which has grown over time about what supplementarity means. It means effectively domestic action up to at least 50 per cent of the total effort. I do not think our view is that we should be looking to achieve our targets by unfettered purchasing of overseas credits. What we should do is adopt an approach which is internationally recognised. Q242 Mr Rogerson: On this concept of flexibility, could we say that there is an argument that the whole point of this is to take it beyond the political debate and set in stone what we want to do, so that you are taking it away from political pressure and the only political pressure is on the government to deliver as opposed to all the other pressures on the government to back away from the targets that have been set? Would you not agree that allowing that flexibility means that there are not necessarily the organisations you represent but others as well in society who will be pressing to move away from those targets? In allowing us to do that, we are undermining the whole thing. Mr Salomone: I see where you are coming from. We would not see having flexibility in there as an entirely bad thing. Having rigid targets is not a substitute for a sound judgment by an expert body that the Carbon Committee provides in government. There is a role there. We are not going to be able to set accurate targets for every single eventuality necessarily. That is our main point. There needs to be a balance between certainty and flexibility but that lies somewhere in the middle. Q243 David Lepper: The role of the Committee on Climate Change is obviously going to be an important one. The government sees the role of that committee as independently assessing how the UK can optimally achieve its emissions reductions goals. In the EEF you talk about the committee having mainly advisory rather than a policy making or proposing role and you see that advisory nature as central to its independence of government. Could you explain that, please? Mr Salomone: What might be a problem for the Committee on Climate Change would be proposing what the budgets are, setting the budgets and then reviewing whether progress against those budgets was achieved. There could be a conflict of interest there. It is far better to have someone standing back objectively and making a recommendation that these are the levels of carbon constraints that look feasible or these are the levels we need to achieve our emission reductions targets than for government to set the targets and for the Climate Change Committee to review them. That might give it a degree of independence there. Q244 David Lepper: It seems to me to weaken the role of that committee. Mr Salomone: In setting the targets? Q245 David Lepper: You see it as a body that should be reviewing what has been achieved? Mr Salomone: Advising on what should be done. Q246 David Lepper: Advising and then reviewing rather than setting the targets? Mr Salomone: That would be the responsibility of the Secretary of State. Q247 David Lepper: The kinds of analogies that we heard earlier this afternoon and indeed from some of our witnesses on Monday with the Monetary Policy Committee are not the kinds of analogies that you feel would be appropriate to the role of this ----? Mr Salomone: We would probably favour the model that is being put forward now. Q248 David Lepper: Have you looked at what the Bill says about the range of expertise which should be represented on the committee? I address this to all four. Does that seem adequate? I wonder if you have any views - as well as the individual members - on how those members should be resourced to carry out their work. Mr Stace: The members of the committee must be experts, not stakeholders. The list we see within the Bill sees the expertise that is needed. In terms of resource, this committee needs to be adequately resourced and, more importantly, to enable them to be an independent body their secretariat needs to be independent. There was some talk earlier that perhaps the secretariat should come from the Office of Climate Change. We would be thinking that they may be recruited from certain people who may be currently part of the Office of Climate Change but once they step out of that and step into the role of the secretariat for the Committee on Climate Change they would be independent of government and government departments. Ms Simmonds: We would reflect those views. We would like to see a secretariat that is independent of government. Mindful of what was discussed earlier, also not wanting it to be a conflicting relationship between government and the Climate Change Committee. There is a need for that to be avoided. I do not think we necessarily want to see a Climate Change Committee that is criticising government through creating a high profile, but rather through a relationship that is about monitoring progress and providing recommendations in response to its progress. Q249 David Lepper: So far as the resourcing goes, a clear distinction between government departments and those who are working on behalf of the Climate Change Committee? Ms Simmonds: I think so. Without that you have potential to co-opt the committee or to weaken the committee. Mr Roberts: Just as the draft Bill suggests the expertise that needs to be reflected in the committee, one will want to see some sort of reflection of that type of expertise in the secretariat. That might suggest that the pool of the secretariat is not just from the classic Civil Service but from outside of it. Q250 David Lepper: Industry perhaps? Mr Roberts: The scientific community perhaps, for example. Q251 Lynne Jones: I presume from the earlier comments that you are all comfortable with the idea of the enabling legislation to introduce new trading schemes? Do you want to make any comment on that? Mr Roberts: In our evidence we did indicate that, whilst we are comfortable with the basic principle, we are concerned that that might lead government to pursue particular emphasis on a particular part of the economy. We want to watch out for that. In other words, by focusing particularly on the use of powers to introduce trading schemes, the natural inclination might be to focus unduly on additional effort that can be achieved through the business community rather than through other parts of the community. Q252 Lynne Jones: One trading scheme could be personal carbon allowances. What is your view on that? Mr Roberts: It is not one where we have developed an extensive view but personally I think it is an interesting idea. There are some significant issues to overcome, both practical issues and also some social equity issues. There will be parts of the community that are perhaps more at ease with the idea of trading on the back of a personal carbon quota and some parts of the community that might find that a bit more challenging. Q253 Lynne Jones: You heard the discussion earlier about other policy instruments that could be introduced through enabling powers. Do you have any suggestions or concerns about this? Mr Salomone: Our understanding of the rationale of the enabling powers is that there already are the means to introduce fiscal measures and regulation without recourse to primary legislation and that is the concept of bringing this into here so that there is the same opportunity for emissions trading schemes. We would echo a lot of the views of the CBI. It is quite a wide ranging power, hopefully one that will be exercised with caution and, in that respect, we are glad to see that the trading schemes that can be introduced through this route would have to involve free allocation because we think that there are potentially more serious financial consequences for emissions trading schemes like auctioning and we think it would be appropriate for those to come forward via separate legislation. Q254 Lynne Jones: Professor Gibb was suggesting that the Climate Change Committee should have some oversight of these areas of policy. What do you think? Should that be enshrined within the legislation or should that just be a general competency? Mr Salomone: I think it is in the Bill that the Secretary of State would have to consult the Committee on Climate Change before introducing enabling powers. That would seem appropriate. Q255 Lynne Jones: I do not mean enabling. I mean other measures, building regulations, social measures. Mr Salomone: It would definitely be appropriate to look at what the appropriate burden across society is and what types of policy instruments are most appropriate in different sectors. Absolutely. Mr Roberts: Yes, we would agree. Q256 Mr Drew: Can I be sure what your response would be to a community that might want to go further than the government is currently suggesting? This notion of a carbon free community is very attractive but that obviously has an impact on your members. There is a real danger, if you saw communities being picked off because they have a lot of ambition but individual companies would say, "If you do those sorts of things, we are out of here". How do you try and remedy that danger, or do you not see it as a danger? Do you see that we must go forward? Mr Stace, I saw your eyebrows raised. That is what we have learned from Germany, that there were states that have gone further and faster and have now gained by it but there was pain in the short run and there must have been some interesting discussions with industrialists. Mr Stace: It is a very difficult question. Q257 Mr Drew: It is a hypothetical one but it is one that could well arise. Mr Stace: Just as an individual you might find it a doable thing to become carbon neutral but in terms of heavy industry, if you are producing steel, you are producing carbon at the same time currently. With carbon capture and storage and other measures, the steel industry currently is going through a European funded project to develop ultra-low carbon steel and also is looking to carbon capture and storage. Yes, in the future, we might see a drastic reduction in the amount of carbon produced per tonne of steel. However, in terms of locally here within the UK moving towards that, in terms of sectors that have very limited abatement technologies currently and more importantly are very exposed to international competition, such as steel, you have a very difficult problem there. Once you start to internalise the cost of carbon within your production and therefore increase your cost, can you pass that cost on to your customer? We believe there are certain sectors of the economy that can pass their costs on. One of the easiest ones is the electricity supply industry. At the other end of the scale is the steel sector that cannot pass its costs on and we see the issue of carbon leakage as being very significant for our sector and potentially very damaging for our sector. I do not know if that fully answers your question but for certain parts of the economy and society it will be much more easy. Q258 Lynne Jones: This is for the EEF. You have argued that carbon allowances should be distributed without charge, for free. Why should this be the case given that there is a lot of evidence that, when permits were allocated free of charge through the EU trading scheme, there has been excess profit in power generation sectors? Mr Stace: What Roger was saying is, if it is secondary legislation with enabling powers, then free allowances. We are not saying that our trading schemes always have to allocate allowances free of charge; it is just with enabling powers. Q259 Lynne Jones: That is the only way in which any new schemes would be set up so why should the allowances be distributed free? Mr Salomone: I may have misunderstood but I thought what the Bill was doing was introducing a quicker route through secondary legislation whereby you could introduce certain types of emission trading schemes. One of the criteria for that would be that allocations have to get allocated free, but there would still be the route through primary legislation to introduce a different type of trading scheme. I do not think that would be precluded by this piece of legislation, unless I am wrong. Q260 Lynne Jones: Secondary legislation is a way of doing it more quickly but why should the fact that you have introduced them on a shorter timescale make any difference to the rationale for allocating the permits? Mr Salomone: There would probably be more opportunity to debate the issues and scrutinise them as they went through the course of primary legislation. Mr Stace: We see the energy performance commitment potentially coming in and it is something that we respond to in consultation and support. That is not issuing free allowances there. Q261 Lynne Jones: There was a discussion about this whereby there would be an option initially but the money raised would be redistributed. Are you comfortable with that concept? Mr Stace: Yes. From what I understand in terms of the energy performance commitment, the revenue being recycled is recycled proportionally more to the companies that reduce their emissions by the most. We would support that approach. Chairman: Thank you very much indeed and thank you for your written evidence. If, as a result of this, there is anything further you would like to submit in writing to the Committee by way of additional thoughts or reflections, we are always very grateful to have it. Thank you very much for coming. |