Examination of Witnesses (Questions 280
THURSDAY 2 NOVEMBER 2006
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
Q281 Mr Mudie: That is a quality
of life thing though in terms of particular sectorsfishing,
et ceterabut 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
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
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 energyI guess you would focus on solar hererepresent
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
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 Smithwhich I am sure you do notthe
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
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 levelbecause at state level there is movement towards
accepting that there is a role for government in providing the
frameworks for businesses and tackling climate changethere
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
1 Note from Witness: This information can be
found at: http://www.eci.ox.ac.uk/research/energy/downloads/predictanddecide.pdf Back