Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 280 - 299)



  Q280  Mr Mudie: I get some impression that you see global warming has a greater effect on prosperity than a shortage of natural resources or energy resources. Is it that you see that energy resources can be dealt with in a different way but if we do not deal with global warming it will affect trade, business, standard of living and life?

  Mr Bullock: I think global warming certainly is a major issue but we should not forget that the other big issues are the drawdowns in the biocapacity of the earth and the UN millennium ecosystem report is very clear on this. We have to stop exploiting forests, fisheries and other resources for environmental reasons, but not least because one billion people for example rely absolutely on forest products for their livelihoods. That is being destroyed at a vast rate, largely because of the pressures from globalisation to liberalise economies which are taking out the few weak controls we have. It is crucial that the pattern of globalisation changes. There is a strong role for government here to regulate, to have clear frameworks in which trade works so that it does not destroy the habitats that so many people rely on.

  Q281  Mr Mudie: That is a quality of life thing though in terms of particular sectors—fishing, et cetera—but energy resources underpin all our economies. If we cannot get something to replace them as we deplete them, then the whole thing collapses and that is more fundamental. It is very important for us in fishing et cetera, but the other one is fundamental.

  Dr Jenkins: The link between energy resources and natural resource use and climate change is clearly made in the Stern Report, where he is saying the benefits of dealing with climate change properly will have add-on benefits in terms of security of supply, in terms of developing alternative energy supplies and also in terms of resource use and increasing efficiency, using other resources, because you are trying to reduce energy use in doing so. He makes a very clear statement that you get added benefits by tackling climate change properly.

  Q282  Mr Mudie: I came in on the back of an answer you gave on transport and the price or the market unfettered will deal with this problem. Do you think the price mechanism will be a sufficient way to deal with demand on limited fossil fuel resources?

  Professor Neumayer: I think so. I have no doubt about that. The markets will react properly to the current loss in resource prices that we have. There will be increased exploration. New deposits will be found. There will be investments in technology. I do not think availability of energy resources is the real problem. My prediction is we will never use up all the fossil fuels that there are probably because of climate change. This is a short-term phenomenon that we see, mainly politically. There is no such thing, in my view, as real economic scarcity of non-renewable energy resources at the moment.

  Q283  Mr Mudie: Gordon Brown is calling on the World Bank to create a 20 billion global fund for alternative energy. Is this a good initiative and is it a sufficient initiative?

  Professor Neumayer: I think it is a good initiative because there are negative externalities of fossil fuel use. There is an incentive. There is a reason for governments to promote alternative energy resources, mainly for environmental reasons rather than resource availability reasons. Is it sufficient? That is a lot to ask for the World Bank to do but on a global stage it is not sufficient. There would have to be much more effort in research and development to bring about these new technologies. Again, it is a collective action problem.

  Q284  Mr Mudie: Does he have the approval of Friends of the Earth?

  Dr Jenkins: In terms of the World Bank, reforming the World Bank to make sure that the money is provided for developing countries to do the right thing in terms of sustainable energy resources is excellent. The other issue to look at is what part of the World Bank's portfolio continues to support fossil fuel development and getting that in the correct balance. In terms of being able to develop those renewable resources, whilst the World Bank may have a role in facilitating investment in that way, there are many more things that need to be done to stimulate that renewable energy technology development.

  Q285  Mr Mudie: For example?

  Mr Bullock: I can give one example.

  Q286  Mr Mudie: Gordon would like you to give as many as you like.

  Mr Bullock: What Gordon Brown is doing internationally is good and we welcome it. The other place where action has to happen is domestically, of course. We have a leadership role internationally but emissions, since Labour came to power, have gone up which does not send a good signal. There is an awful lot that Gordon Brown can and should do through the Budget process and the spending review process to make it cheaper and easier for businesses and individuals to invest in energy efficiency or new technology. As an example, it has been in the press in the last month or so that the grant for householders to put solar panels on their roofs has run out after six months. It is because it is £3 million. It is a tiny sum in the context of what Nick Stern is talking about in terms of trillions. As well as international measures we do want to see a shift in the economic framework to make it easier for people to do the right thing. As one further example, just in the transport sector in the last 10 years the cost of flying has gone down; the cost of motoring has gone down and they are the two most polluting modes. In comparison, the cost of rail has gone up and the cost of going by bus has gone up. They are the two comparatively less polluting modes. That is sending entirely the wrong signals for transforming our economy to a low carbon one. We do want to see national action as well as international action.

  Q287  Mr Mudie: When I was in China 20 years ago, I was in Shanghai and I thought then, when I saw all the bicycles, that if we did not help them very quickly and get in with a very good public transport infrastructure when they became prosperous those bicycles would all be individually converted to cars with disastrous effects. We obviously have failed in that. How are we doing with helping them to get away from their dependence on coal as a basic energy source?

  Professor Neumayer: I do not think we are doing enough. There are mechanisms built into the Kyoto Protocol. There is a clean development mechanism to help developing countries to get to low carbon technologies. You can even get it credited on your own emissions obligations, but it is too little. Is it too late? I was about to say too little, too late. I do not think it is too late yet but it is far too little. That is the trouble. Again, it is a bit of a collective action problem. Any one single country will find it very difficult to say, "We have to do this on a very large scale" if the other ones do not help at the same time.

  Q288  Kerry McCarthy: The Stern Report has kick started again the whole debate about environmental taxation. What do you see as the main obstacles to imposing environmental taxes, particularly as far as business or selling the case to the wider public but, in particular, to the business community?

  Dr Jenkins: It is back on the agenda. If you are specifically looking at taxes aimed at business, we are in a situation where we have two things on the table for businesses to be able to operate. First, we have the EU emissions trading scheme. Secondly, we have the climate change levy within the UK which is linked to trading mechanisms. The problem we have with both of those is that the cap on the emissions trading was set far too low. Too many free allowances were handed out. If you look at the tax system as a method of being able to correct some of that failure in the trading system, you do not need to look too far beyond the climate change levy. It needs reforming, without going into the detail, but it was a good example of two things. Firstly, the amendments made to it before it came in were very useful because, as well as bringing in revenue and increasing the cost of it being an efficient use of energy, it provided incentives to use renewable energy. As well as reducing employers' national insurance contributions, it used some of the revenues to set up The Carbon Trust and give advice to small and medium sized firms. It was a package of things which had incentives, sticks, carrots and it was able to help things go forward. The problem was, after bringing it in, the rate had been frozen very quickly and it has not gone any further. If you look at the effect that the levy has had, there was a piece of work done by the Policy Studies Institution saying it has been quite effective in companies taking action. They were thinking about many of the measures they took, simple, low hanging fruit measures. It was only when the price was put on it that they took the step of investing and they are quite able to take them on as cost effective measures. That shows the past experience of how business has been able to cope with it and, secondly, to sell the opportunities that are there to increase efficiency, develop new products and use new forms of energy. That is what needs to be presented to them as a package as opposed to just a stick. It needs to be presented as a package that has carrots as well.

  Professor Neumayer: Environmental taxes are a perfect instrument but there are two main reasons for concern with them. Those who have to pay the tax will say, "Why does my burden overall increase?" Even more so, to have a real effect you need quite high taxes. The only way to deal with this is to make sure that the overall tax burden for those affected does not increase. If you levy it on business, for example, you can lower other capital income taxes. If it is mainly on people, try to lower income tax to compensate them. Be open about it. Say, "This is going to be a major burden on you on one side but we are going to compensate you on the other and try to make sure that overall you are not any worse off than before." That is the only way forward because to be effective you need high environmental taxes, not a few pence here and there. The second thing is the distributional concern. I do take it seriously. People say that environmental taxes hit poor people relatively more than the rich. That is obviously true. However, we must not forget that poor people also usually suffer more from environmental pollution, at least that which is local. The only way to deal with it is to try to steer against that with different instruments. If we think that large scale, environmental taxes will hit the poor more, we have to make sure that income taxation benefits the poor more than it does already to compensate for that.

  Q289  Kerry McCarthy: In terms of environmental taxes and business, you would be looking mainly at adjusting the climate change levy and the emissions trading scheme rather than looking at new forms of environmental taxation?

  Dr Jenkins: No. In the light of what Stern is saying, it is right to say that where we are at the moment is completely inadequate in terms of what has happened so far in tax shifting. There are lessons to be learned from that and from using energy taxes in other countries. What needs to be presented is a positive package of measures of which those taxes are part. The Chancellor needs to start that debate now and he needs to be very open and honest about it, but it is going to be a shift change in the levels of taxation. The more ideas, both looking at the evidence from this country and from other countries, the better in opening up that debate.

  Q290  Kerry McCarthy: If I can turn briefly to aviation, there has been a lot of focus on the potential contribution to emissions if airport growth is allowed to continue along current trends. I think it is generally accepted that there has to be some sort of brake on the extent of the growth. What would be more effective? A tax on air travel or including aviation in the EU emissions trading scheme?

  Mr Bullock: I would say both, and one more thing as well. Emissions trading has the potential to deal with the impact of aviation if it is designed well. At the moment with the EU ETS the signs are not promising. Although it is an early scheme, it has not been very effective so far. We are concerned about the effectiveness of it. Secondly, getting aviation into the EU ETS is some number of years down the line so something else needs to happen in the meantime. Tax can do a very good job here. For example, the simple use of air passenger duty could have an effect.

  Q291  Kerry McCarthy: At the moment, it is set at £5 or £10. If it was doubled, if you have a £50 return budget airline flight somewhere with a £5 duty on it each way, would it make any difference at all to the number of people travelling?

  Mr Bullock: The Environment Change Unit at Oxford University just published a report called Predict and Decide which has a lot of very detailed modelling on how you would have to change air passenger duty to slow down demand.

  Q292  Kerry McCarthy: You are looking at a very substantial increase for it to make a difference?

  Mr Bullock: I cannot remember the exact figures. I will send them to you[1] but we are talking about a £15 a year escalator. It would go up £15 every year. It is more complicated because the price you need to put it up by does change compared with what tickets you are dealing with. £15 on a £300 ticket does not have as much effect, for example. The other main thing that does need to happen as well as tax and trading is a review of the Aviation White Paper. It is predicated on the belief that we should expand aviation up to 2030 or 2050 and triple it. That is completely incompatible with climate change goals. To allow the expansion of runways does not make a lot of economic sense either simply because we cannot use full capacity if we are going to tackle climate change. You are locking in what will be a useless waste of capacity. The aviation runway expansion programme is based on cost benefit calculations which firstly neglect the role of climate change to a large degree. They undervalue it. Secondly, all the economic benefit is based on the fact that you will be able to use the runways to full capacity, which is not an acceptable, real world assumption any more. The whole rationale of the White Paper falls apart if you put real world assumptions into it. What we are calling for with lots of other groups as well is for the government to rewrite the Aviation White Paper and say that it is not acceptable to build new runways.

  Professor Neumayer: You can and should slow down the growth in aviation a little bit or perhaps more than just a little bit. You can, however, never reverse it for two reasons. First, historically speaking, we observe a shift from slow transport technologies to faster technologies. That is a trend with a very strong demand for faster and faster transport technologies. Second, because of this, in order to reverse it you would have to impose such a high tax on it that it is totally unrealistic. You can slow it down but you will have to live, unfortunately, with the problem and probably deal with the negative environmental consequences by doing even more in other sectors. Slow it down but we will have to stick with it.

  Q293  Mr Newmark: Given that renewable energy, at least at the moment, does not make any significant contribution to any economy, can it ever be a viable alternative to fossil fuels?

  Professor Neumayer: Absolutely. There is absolutely no reason why the world economy cannot run on solar energy, either directly or by producing hydrogen which you can pump through pipelines or ship through super tankers. In the 19th century, the oil of today was coal. People were concerned about running out of coal and would we ever be able to substitute it. We substituted it with oil. Oil was the resource of the 20th century. My prediction is that mainly solar and a little bit of other renewable energy resources will be the energy source of the 21st century.

  Q294  Mr Newmark: To what extent does renewable energy—I guess you would focus on solar here—represent an opportunity for businesses in the UK? How can we capitalise on that? Should that be driven by the market? Should that be supported by the government in some way through tax breaks?

  Mr Bullock: The Stern Report is clear that we have to have a big expansion of renewables but what they say is that the power generation sector is very difficult for new technologies to come onto the market for four reasons. The sector is very risk averse. The infrastructure mitigates against new technologies to a large degree. For example, the grid structure makes it harder for microgeneration to come onto it. There are still massive subsidies for other technologies, particularly for example nuclear, and there is a lack of competition. It is dominated by a lot of big players who have a lot invested in big plant. His conclusion is that it is going to be very difficult for us to rely on the market alone to deliver these new technologies. What it needs is major government investment and subsidy, tax breaks and grants, like every other energy technology had when they were developing as well.

  Q295  Mr Newmark: You do not really see a role in the private sector; it has to be driven by government and taxpayers funding that change?

  Mr Bullock: It is both.

  Dr Jenkins: There is a key role for businesses to play. They play the role that businesses do and government should play the role they do. They need to be able to regulate the market and give the incentives for business to be able to deliver, to do the things they do best which are obviously to innovate and take opportunities when they are defined in a framework that government sets. It is a regulated market as it currently stands anyway. It is regulating it to deliver those things better. There is a role for tax incentives and subsidy. Other countries around the world are using those things. It is a matter of getting the right balance of policies to make these work. The biggest question at the moment is the size of them. It is still too small. If you look at the levels of public subsidy given to nuclear power over decades, the amount given to renewables is absolute peanuts in comparison. That is what you are looking at. If you look at where the markets are for those technologies, they are huge and expanding and we are being left behind. It is vital that the government addresses that as soon as it possibly can.

  Q296  Mr Newmark: How do you respond to the argument that the economic implications of climate change will inevitably result in the development of green technology which, in itself, will deal with climate change?

  Dr Jenkins: Can you say that again?

  Q297  Mr Newmark: Climate change is happening out there. There are implications to climate change. If you believe in Adam Smith—which I am sure you do not—the invisible hand would say that we have a problem; we have to deal with it and therefore that change will happen.

  Dr Jenkins: We have just had Sir Nicholas Stern, ex-chief economist of the World Bank, reviewing over a period of a year all the evidence on it and his firm conclusion is it is a massive market failure and therefore the government needs to take a key role in setting out the framework within which it operates. Those firms within those markets will then respond to that but they will not do it unless government has hands on, clear, decisive action.

  Q298  Mr Newmark: There still needs to be a step change in these alternative technologies. There is a huge time lag, whether it is solar, wind, tidal or whatever. We have probably 200 years' worth of coal here. I have been to China a few times and they scrape it off the surface. Rather than fighting that, why do we not harness that technology through carbon capture. I am on the science and technology select committee. The technology is there today to capture that carbon, so as to effect carbon neutral emissions and nothing comes out, and accelerate that investment. What are your thoughts on that? Rather than keep fighting coal the whole time, why do we not revisit coal and use that as a transition?

  Dr Jenkins: The scale of the problem we are facing with climate change means that there is going to be a whole range of solutions to it. The fact that India and China, two of the fastest growing economies, have huge reserves of coal means that coal will be on the agenda and there have to be solutions in terms of the technologies of how it is used more efficiently. There is gross inefficiency in how coal fired power stations currently operate. Carbon capture and storage offers an interesting opportunity. Some of the technologies that are on the table at the moment have problems connected to them but it is definitely an avenue that needs to be explored because all of those things will need to be part of the solution. One of the big things with climate change in terms of the policies and the technologies is that this is not an either/or scenario often. It is the best way forward on each of those things.

  Q299  Chairman: Kyoto post 2012? What do we have to do? Given that the Kyoto Protocol tackles global warming by establishing emission targets and a carbon trading system, can such an approach ever work in a way that satisfies countries like the US and Australia and the developing nations? How can the lost opportunity costs of slowing global warming be fairly distributed between the extremes of rich, developed nations and poor, developing nations?

  Professor Neumayer: The rich nations will always have to do more than the poor. It is absolutely clear. The developing countries are totally united behind this. There is absolutely no getting around that. The western rich countries have to do far more than those developing countries. That is one of the things that the US does not really want to accept so that is a problem. For a post-Kyoto Protocol, at least the most important developing countries have to be on board. We cannot have another exclusively western developed country agreement any more. It is not environmentally sustainable and it does of course fuel the US opposition to it, which it had already against Kyoto, that developing countries were not part of it, so countries like China, India, Brazil, South Africa should be included and ideally all the developing countries, but I do not see that coming. Kyoto was an important first step. It is full of problems and shortcomings, both environmental and economic, but it is the only game around. We have to build on this. Hopefully there will be a post Kyoto agreement. Again it will be full of problems. It will be insufficiently ambitious but there is no alternative to it. That is the process that is there. The US has an idea of saying, "Let's ditch this and we will do some sort of side deal with some countries". The US has the idea that there will be a technological fix to it that will be the only answer. That will not work. That is a dead end.

  Dr Jenkins: I entirely agree. The Kyoto negotiations started in Nairobi are absolutely vital. They are the game in town. They need to make sure that it is the rich countries that do more for those developing countries. On the issue of the US, not at a federal level but at a state and city level—because at state level there is movement towards accepting that there is a role for government in providing the frameworks for businesses and tackling climate change—there seems to be some movement in the US position. It will be interesting to see how they go into it, but I think increasingly there is a feeling within the US, within these different states, that will put pressure on for them to change their mind. I am hopeful. We will see.

1   Note from Witness: This information can be found at: Back

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