Examination of Witnesses (Questions 259
THURSDAY 2 NOVEMBER 2006
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
Dr Jenkins: I entirely agree with
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
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
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
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 accountneither are
the social impacts often in the other countriesyou 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
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
Professor Neumayer: I would be
in favour of it.
Dr Jenkins: Our position on food
in terms of its position in trade negotiationsand it is
backed up by various bits of researchsuggests 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 sayingand it is quite interestingis 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
Q270 Angela Eagle: I am coming on
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
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
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
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 blockso,
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
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
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 gainyou
hinted there was, Mr Bullockin 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.