Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 259 - 279)

THURSDAY 2 NOVEMBER 2006

MR SIMON BULLOCK, DR TIM JENKINS AND PROFESSOR ERIC NEUMAYER

  Q259  Chairman: Good morning. Welcome to the second half of our session on globalisation. Could you introduce yourself, please?

  Professor Neumayer: My name is Eric Neumayer. I am a professor of environment and development at the London School of Economics and Political Science.

  Dr Jenkins: My name is Tim Jenkins. I am an economics campaigner at Friends of the Earth in England, Wales and Northern Ireland which is one national group of an international network covering 60 countries.

  Mr Bullock: I am Simon Bullock, also an economics campaigner at Friends of the Earth in England, Wales and Northern Ireland

  Q260  Chairman: In light of the Stern Report out this week, are the forces of globalisation inevitably destructive to the environment or can we process that globalisation in an environmental and sustainable way?

  Professor Neumayer: If globalisation is left on its own, it will be destructive to the environment. There is very little doubt about that but, if managed properly, there is absolutely no reason why globalisation has to be detrimental to the environment. It is all a question of how we manage and regulate it.

  Dr Jenkins: I entirely agree with that statement.

  Q261  Chairman: What? I was looking for some disagreement here.

  Dr Jenkins: If the question is how you regulate it and what you do, Stern gives some pointers towards that. One of the strongest messages he gives about globalisation is that he refers to climate change as being the largest market failure the world has ever known. In looking at the problem and the solution, he is quite clearly saying the role here is for governments to make sure that they regulate those markets, with the most appropriate policies. The question for globalisation or the current pattern of globalisation and the current political agenda on globalisation around trade and investment is obviously around liberalisation but it is extended into an idea that controls of environmental impacts in some ways are set against this liberalisation agenda. Stern clearly says that the way in which we make sure that globalisation or a global economy operates within environmental limits is by hands on government. The role here is for government to do it rather than hands off. That is a debate for globalisation policy in general and a bit of a wake up call as well.

  Q262  Chairman: Martin Wolf states that local environmental harms such as air quality tend to fall as a nation's income rises after a certain level, but global harms such as global warming tend to rise continuously. Do you agree with this and, if you do, what are the implications for government policy?

  Professor Neumayer: The statement is partly correct. We do have some evidence that certain environmental pollutants go down with higher income levels but it is by no means a panacea. It is wrong to think that economic growth as such will solve environmental pollution. The evidence that we have is that, whenever there was a positive effect, it was always via government regulation that brought this about. The same will happen with climate change. I do agree with what has been said before. It is for governments to set the parameters and to set the constraints correctly for the business sector, for example, to impose a price on carbon and then we can solve the problem. Just leaving it to the markets will not solve it because it is a market failure. By definition almost, it cannot solve the problem on its own.

  Q263  Mr Gauke: From an environmental perspective, do you think the world should be trading less or more? What should be the direction of travel?

  Mr Bullock: The first issue here is what sort of trade it is. Currently, there are so many different market failures existing. As a good example we can cite air travel and shipping. Because air travel is untaxed, it means that there is a huge environmental impact per unit of trade which would not happen if that large market distortion did not exist.

  Dr Jenkins: When we are looking at trade, why you want more or less trade is largely because you are hoping that it will increase economic welfare in our country or in others. Stern is a very good example of this. It questions what type of growth is believed to be the method of increasing welfare. At the moment we have got it wrong. There is a colossal market failure in climate change and he does mention one of the other areas where that is true and that is in deforestation and use of non-renewable resources. The question comes back to trade and the essential question is now how much; it is looking at what there is. Again, that is because a lot of the agendas that are looking at where we take policies forward on trade, investment and globalisation tend to see it as just more is better. What this is clearly saying is that that is not true and we have to find ways of having a dynamic, flourishing economy at a national and global level that stays within those parameters. Those parameters have to be very clearly set by government.

  Q264  Mr Gauke: Do you think there can be circumstances where trade has environmental benefits? For example, Martin Wolf argues that BSE was caused in this country because of intensive farming; whereas if we had open trade with, say, Brazil or Argentina, we would not have pursued that policy. Even Adam Smith says that if you put enough money in you could make wine in Scotland. Do you think there is much in that argument?

  Professor Neumayer: In that particular argument? I do not think so. You would have cattle raising perhaps in the Brazilian Amazon and different environmental problems somewhere else. There can of course be examples where trade is absolutely beneficial to the environment. That is not just trade in environmentally beneficial goods, if you think about sewage or water treatment, but it is clear that if you had to produce all the things that people want in autarky it would be much more environmentally detrimental than if you allowed trade. It is not policy makers' business to decide how much trade there is or what type of trade there is. Their only business is to say if transport does not pay its full costs this has to be corrected. Leave everything else to the private market.

  Q265  Mr Gauke: You raise the point of autarchy and there are some environmentalists who argue that there should be smaller, self-sufficient countries, regions or whatever that look after themselves. Can I ask what is your view from the Friends of the Earth perspective on that approach to dealing with the matter, because it is argued that it is environmentally friendly.

  Dr Jenkins: If the policies are there to make sure that trade operates within environmental constraints properly, as Stern again is suggesting, it will have major impacts on patterns of trade. One of those impacts may well be that what you find is products currently sourced on a global market would not be sourced on a global market because the prices would not be right. You would end up, for example, with certain food products or whatever. At the moment, because there is a huge market failure and those things are not taken into account—neither are the social impacts often in the other countries—you would find that self-sufficiency happening more in any case. It is not that we are prescribing. I agree with Eric. It is not for governments to prescribe and design that themselves but it is correct for them to say that there are parameters here that you cannot go beyond. Growth is within environmental limits and if it operates within those you undoubtedly would see a change in the pattern of trade and a change in the pattern of global, economic activity.

  Q266  Mr Todd: Many NGOs argue for the reduction of trade barriers protecting agriculture in the developed world because agriculture is normally an engine of economic growth in the developing world. Is there a contradiction between that and your desire for a reduction of environmental impact from global trade?

  Professor Neumayer: It is difficult to say because the environmental impacts of agriculture are very different in developed countries compared to developing countries. In developed countries, the intensity of farming, the pesticide used, the fertilizers mean problems related to this but that does not necessarily mean, if this goes down, we import agricultural products from somewhere else and that will be environmentally benign. As I mentioned already, in Brazil, for example, you have enormous increase in soy in agriculture which is often done—

  Q267  Mr Todd: Let me give you an example: sugar, one of the most protected regimes in the world, a key crop of many developing countries. The removal of trade barriers will open access to markets in America and Europe for sugar. Are there any difficulties to you in that? Obviously it creates wealth in those countries. Is it perhaps an issue of choosing one's priorities?

  Professor Neumayer: I would be in favour of it.

  Dr Jenkins: Our position on food in terms of its position in trade negotiations—and it is backed up by various bits of research—suggests that food is quite unique in developing countries in terms of what it means for them, for the welfare particularly of the poorest people in those countries. One of the problems of seeing it only through the lens of global trade in crops such as sugar is that what you tend to get is that those communities and the vast majority of the population in those countries suffer and have reduced economic welfare. There is a strong case for saying that food should be taken out of the trade negotiations.

  Q268  Angela Eagle: What all of you are really saying—and it is quite interesting—is that economics need to absorb both social and environmental analyses into its analysis in order to be a reasonable tool to guide us in the way we now go forward. Is that not what both of you are saying? We have to deal with this colossal market failure by developing other methods of analysing what is going on and deciding on whether it is something that we should be pursuing or not.

  Mr Bullock: I think that is absolutely right. It is one of the key conclusions from Nick Stern's report on climate change. That has to be factored in. If you do not include the environment in your considerations, it is catastrophic for the economy. It is something that Gordon Brown said as well in his speech to the United Nations in April, that economic growth must be matched with environmental care. He is explicitly saying we have to integrate the two rather than trading off as has so often been the case in the past.

  Q269  Angela Eagle: Professor, is there any economic work going on to make economics a better tool for doing that?

  Professor Neumayer: Yes. There is a lot of work going on. You have had for the last 30 or 40 years the development of environmental and natural resource economics, ecological economics as well. This is because of a recognition that we need to take these things into account. Do not get me wrong. Economics are pretty clear. The huge challenge is a political one.

  Q270  Angela Eagle: I am coming on to that.

  Professor Neumayer: We know the things we have to do and we know the tools that we have but to get there is the interesting thing.

  Q271  Angela Eagle: You surprised our Chairman by all agreeing at the beginning that there is a role for governments to regulate markets and try to somehow compensate for these huge market failures or expand our economic analysis to include externalities such as pollution and environmental damage. There was a great and welcome cry from all of you that national governments need to be doing something about this, but national governments cannot in isolation, can they? That is the conundrum here. Do we not need much stronger, reformed multinational organisations to deal with this? How do you see that developing?

  Professor Neumayer: I do not think we need a multinational organisation for it. I do not think we need a world environment organisation as such to deal with it. What we need is international, concerted action. There is no doubt about it. It is not only a market failure; it is also what we call the collective action problem. No country on its own can solve it. It is only the world that can solve it. The real trouble is that the only super power left in the world, the biggest economy in the world, is kind of telling the world, "We are not interested." It is for countries like the UK and the European Union in the broader picture to exert their leverage and influence on trying to change this. Without the US being on board, there is going to be no change because the developing countries are simply going to say, "If the US does not do anything about it, why should we?".

  Mr Bullock: Multilateral agreements like the Kyoto Protocol are excellent first steps. That was a real breakthrough international agreement. It does need to have other countries brought on board. Nick Stern's report will go a long way to helping the UK government do that, particularly persuading countries like America to come on board. The second point is really about whether there is a role for unilateral action as well. Certainly there should be multilateral stuff but we have to question the blind assumption that going alone is somehow wrong, firstly because we are not going alone. Lots of other countries are doing stuff, particularly in the European Union.

  Q272  Angela Eagle: So are cities.

  Mr Bullock: Absolutely, and states like California. It is not correct to say that moving quicker or going first is bad. There are massive economic opportunities for countries that move first. Nick Stern goes into a lot of detail about why the potential competitiveness disadvantages that are often asserted from acting first are in fact pretty minor in the scheme of things. There is not a lot of evidence that there are macro threats to the economy from moving quicker rather than waiting for multilateral action.

  Q273  Angela Eagle: What is the role of multinationals here? They are the other huge presence in the world. At the moment their incentives really are not anything to do with not spoiling the environment. Their incentives are to do it and get away with it, if we look at the strict economics of it. Joseph Stiglitz has certainly said that those incentives need to be changed around. How do you see that happening? Do you think that corporate social responsibility is just a farce like that book? The corporation argued that it is actually illegal. Do you think that we need to change the legal structure in which multinational companies work?

  Dr Jenkins: That is on the table in the Houses of Parliament at this moment in time in the Company Law Reform Bill. The part of it that is getting the most attention is the one that we have done a lot of work on, about the legality, saying that three things need to happen. Two of them are relevant to your question. One, directors' duties should be changed so that they have an obligation to take reasonable steps to reduce the social and environmental impacts of their operations. The second one is that there is a right to redress, not just for people in this country but internationally. If that was passed within the UK and was rolled out, say, within the EU, you would have a movement towards something that would be binding. The current more voluntary methods, as all voluntary methods tend to be, are much less effective, such as the OECD guidelines on multinational companies. It requires changes in the law, so the Houses of Parliament have a wonderful opportunity at the moment.

  Q274  Angela Eagle: Professor Neumayer, do you agree with that?

  Professor Neumayer: CSR is a good thing but I would never rely on it. It is a good thing to have business goodwill and to have them on board but without regulation and without setting the parameters they are not going to do enough.

  Q275  Angela Eagle: Legal change is important?

  Professor Neumayer: Absolutely.

  Q276  Mr Todd: I want to touch on the pros and cons of environmental regulation. Does the lack of regulation encourage the displacement of industries to countries which are least regulated? Is there evidence of that?

  Professor Neumayer: There is some relatively limited evidence for that at the moment. We know it is something that would in principle influence investment choice, particularly new investment, less so relocation of existing investment. I do not want to belittle unilateral action, that you can be like a front runner, but that is never going to be the solution because no country on its own could do enough on its own and, secondly, would never find it in its interests to do it alone. If you were to do substantial things, you would then lose out on investment if the other countries do not follow. I am not against being a front runner to a limited extent but it has to be a concerted action.

  Dr Jenkins: Chapter 11 in the Stern Report deals with issues in relation to climate change. One of the interesting things he says in coming to a conclusion is that, firstly, there is only a very small number of the worst affected sectors which have internationally mobile plant which would be potentially affected by this. He tends to find that that problem would largely be within their own trading block—so, for us, within the EU which obviously on climate change has an overall policy amongst its members anyway. The second thing he was saying was that the environment for many of those sectors was not such an important factor for location and competitiveness. He was looking at things like access to technologies, infrastructures, et cetera. He was giving the evidence, having looked at various bits of research, to say that generally there may be a few instances where that is the case and maybe that should be addressed but overall for the economy, no, it is not.

  Q277  Mr Todd: I have not read his full 700 pages. Ship-breaking for example is a good example of a business which has shifted around to find the least regulated environment to carry out business in, which creates wealth for some people.

  Dr Jenkins: I do not know the specifics of that sector. The overall point for policy which I think is key is that in the past being able to wheel out an example where there might be an issue of having to deal with it has meant that no progress has been made which, for the whole economy, is beneficial.

  Q278  Mr Todd: I understand your point but I saw Professor Neumayer nodding.

  Professor Neumayer: This may all be correct but it is not relevant really. What is relevant is what policy makers believe and they are easily scared by business groups saying, "We are going to relocate." There is very limited evidence that this is happening.

  Q279  Mr Todd: Let me turn to the positive which is, by acting first, is there a gain—you hinted there was, Mr Bullock—in terms of promoting innovation in particular sectors of industry which will stay put but will have to perform to higher standards and then develop tradable skills to sell to other people?

  Mr Bullock: Yes. I keep mentioning the Stern Report but it is such strong, economic stuff. If you act early, there are a number of benefits. Firstly, the world market for low carbon products is estimated to be $500 billion a year by 2050, so big advantages for getting into that sector. The other big thing he goes on about is how it roots out economic inefficiencies so that businesses can save vast sums of money by energy efficiency measures. Also, at a national and an international level, the Stern Report says that there is currently a £250 billion a year subsidy for fossil fuel industry. Clearly, as that fossil fuel investment is causing the damage they are trying to stop, being able to root out that inefficiency would be very strong for national and international economies too.


 
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