Select Committee on Treasury Written Evidence


Memorandum submitted by Friends of the Earth: England, Wales and Northern Ireland

INTRODUCTION AND SUMMARY

  We welcome the opportunity to give evidence to this inquiry. Our evidence focuses on three of the questions in the inquiry:

    —  Impact of globalisation on the UK economy.

    —  Opportunities and challenges of globalisation.

    —  Implications for businesses.

  In particular we set out four key opportunities and challenges:

    —  Tackling short-termism.

    —  Retaining and attracting people.

    —  Becoming a world-leader in renewable technologies.

    —  Resisting outdated ways of "being more competitive".

  We also address four key Government policy areas towards business:

    —  Promoting innovation through regulation.

    —  The Lisbon Agenda.

    —  Shifting the burden of taxation.

    —  Reform of policy appraisal.

Q1  Globalisation and its impact on the UK economy

  1.  Globalisation is a broad and hugely contested term. In this evidence we take it to mean the continuing increase in cross-border economic, social, cultural and technological exchange. Given the focus of the inquiry on policies that enable the UK economy to thrive in the context of globalisation we will focus only on the economic impact elements of globalisation.

  2.  Conventionally the facets of globalisation to consider in relation to the impact on the UK economy would be about the functioning of the global economy—trade, capital flows, emerging economies, levels of competition, new markets etc. But in this latest phase of globalisation it is the relationship of the global economy to the environment within which it operates, and upon which it relies, that has become of pressing importance not least in relation to climate change. In our evidence we therefore highlight two of the most important facets of the current form of globalisation for our economies:

    —  The continuing and significant inefficiency with which resources are used, and intimately linked to this.

    —  The increasingly rapid destabilisation and removal of environmental systems upon which the UK's and indeed every countries economy relies, as environmental limits are breached.

Inefficiency

  3.  The UK and other Western countries are profligate in their use of energy and resources. Yet as all the world's economies grow, and as the need for absolute cuts in global carbon emissions grows more acute, it will be essential that all the world's economics become far more efficient in their use of resources. For example, given predicted increases in UK GDP of 2.5% a year, and a target to cut UK carbon emissions by 60% by 2050, this means the carbon intensity of GDP needs to improve by a factor of over 10.

  4.  However, globalisation is in many ways currently making this inefficiency even worse. As an example, the increased use of air freighting agricultural produce across the world is having an ever growing contribution to climate change, with its massive attendant economic costs. This increased globalisation is happening in large part because aviation kerosene is untaxed, making it an artificially cheap option. Use of aviation fuel has massive economic externalities, and as a result the continued expansion of aviation is an inefficient use of economic resources.

Breaching environmental limits

  5.  Our economy depends on the availability of natural resources to provide:

    —  the basic inputs to create goods and services;

    —  healthy conditions for people and workforces; and

    —  functioning ecosystems that, for example, regulate the climate, deal with pollution or regulate flooding.

  6.  Wild nature should continue to provide these benefits for millions of years, if we respect the limits of what we can take out of the environment or put into it. If we don't, the evidence shows that households incomes, companies bottom lines and economic performance will suffer.

  7.  The biggest threat of all to these ecosystem services upon which our economies and social well-being relies is climate change.

  8.  As Prime Minister Tony Blair put it:

    "What is now plain is that the emission of greenhouse gases ... is causing global warming at a rate that began as significant, has become alarming and is simply unsustainable in the long-term. And by long-term I do not mean centuries ahead. I mean within the lifetime of my children certainly; and possibly within my own. And by unsustainable, I do not mean a phenomenon causing problems of adjustment. I mean a challenge so far-reaching in its impact and irreversible in its destructive power, that it alters radically human existence."[54]

  9.  Loss of biodiversity and the removal of ecosystems also has profound economic implications. In March 2005 the Millennium Ecosystem Assessment, a joint project of a range of UN and international scientific agencies and NGOs, concluded that ecosystem degradation would for example result in the failure to achieve the Millennium Development Goal of halving hunger by 2015 and would be a barrier to achieving the goals on poverty eradication and health.[55]

How to shape and respond to globalisation

  10.  The good news is that the nature of globalisation, its speed, direction, ability to remain within environmental limits, extent within different economic sectors can all be shaped by Government action and policy. The Kyoto Protocol, other multilateral environmental agreements, and the World Trade talks are all examples where Governments collectively aims to do so.

  11.  The opportunities and threats associated with globalisation for the UK economy are therefore not simply about responding to an independent outside force but are as much about influencing the nature of that force.

Quality growth

  12.  In addressing those opportunities and threats the UK Government must be explicit that its goal is to deliver high quality economic growth, not just focus on increased economic growth. This is because the type of economic growth—its "quality"—can hinder or help progress on the Government's social and environmental goals, and also harm or help the economy. For example:

    —  Types of growth which are highly-carbon intensive will lead to massive future economic costs, both in terms of actual economic damage from climate change, and rising costs as the cost of carbon-based fuels increases.

    —  Types of growth which reduce the quality of life in UK cities will reduce the UK's capacity to retain or attract highly mobile skilled workers in the decades to come.

  13.  Both the Prime Minister[56] and the Chancellor have accepted that a blunt focus on the quantity of economic growth is wrong. In his speech to the UN in April 2006 the Chancellor stated that:

    "Six decades ago, the great British economist John Maynard Keynes, speaking here in America, laid down what he believed were the foundations of economic policy—that it was for government to ensure the twin objectives of high and stable levels of growth and employment. So today I want to propose a third objective on which our economies must be built—and that is we must match growth and justice with environmental care."

  14.  We hope that the Select Committee will press the Chancellor to set out how he will ensure that the Government's economic policies in future do indeed do this.

Competitiveness

  15.  The increasing globalisation of the world's economy has raised concern about the ability of UK industry to compete in world markets. However, a focus on quality growth requires the notion of the competitiveness of a national economy to be rethought—it is no longer sufficient to treat it as being solely about increasing GDP—the quality of growth is crucial.

  16.  Many of the Government's prescriptions for making the UK more competitive are undoubtedly worth pursuing such as improving skills, innovation, education and investment—and would help deliver quality growth.

  17.  However, there have also been demands that government regulations need to be reduced in order to reduce business costs—purportedly in order to deliver a more competitive economy. Nobody would argue against striving for "better regulation" if this means regulation that is well-designed, uses appropriate policy instruments, and meets its essential objectives at least cost to industry and the public purse. But so often, demands for better regulation are actually aimed at reducing environmental and social standards themselves—something that we argue is in fact bad for the long-term competitiveness and bad for quality growth, for five reasons:

    —  High environmental standards in a clear policy framework can be a powerful spur for innovation and hence a driver of competitiveness.

    —  Environmental regulation, including economic instruments, has a track record in driving productivity improvements, particularly around energy and resource efficiency, unlike ineffective policy alternatives such as voluntary approaches.

    —  High environmental standards are crucial to ensuring that the UK succeeds and thrives in getting quality economic growth—rather than any-old growth with all the risks to the future economy and environment that entails.

    —  The UK will not succeed in a globalised world by a short-sighted, knee-jerk reaction of lowering environmental and social standards in a race-to-the-bottom against economies like China: our future competitive advantage will lie in innovation, a highly skilled workforce, and a low and efficient use of scarce environmental resources.

    —  Failure to address environmental challenges will undermine the ability to sustain growth—as environmental systems become more unpredictable and no longer provide the environmental services the economy currently takes for granted but does not include in its cost calculations.

  18.  This view of high environmental standards and a clear policy framework is not just an environmental perspective but an economic one as well. A recent global review of competitiveness by Professor's Daniel Esty and Michael Porter from Yale and Harvard Business School found that

    "economic competitiveness and environmental performance are compatible, if not mutually reinforcing. Low pollution and efficient energy use are a sign of the highly productive use of resources. Policies that stimulate improvements in environmental quality, then, may actually foster improvements in competitiveness that underpin a rising standard of living in the long run."[57]

Q2  Opportunities and challenges

  We set out here four opportunities and challenges for the UK in responding to globalisation.

(i)  Tackling short-termism

  19.  The UK should be taking a long-term view of globalisation—asking what sort of economy the UK will need in future decades, and how we can best equip ourselves for this transition. There is now overwhelming scientific consensus on two of the main changes required in the nature of globalisation.

    —  First, tackling the threat of catastrophic climate change requires that emissions of carbon have to be significantly reduced, with western economies such as our own making the most significant reductions.

    —  Second, in response to the Millennium Ecosystem Assessment alarm call over the rate at which the global economy is drawing down the planet's natural resources which provide essential life-support systems to everyone of us and our economies, the efficiency with which this environmental capital is used will need to increase at least 10-fold.

  20.  This is a threat to the UK economy not just from climate destabilisation and reduction in the ability of environmental systems to provide essential services to the economy, but also from increasing competition for environmental resources—at a time when there are also non-negotiable ecological imperatives for reducing the use of them.

  21.  But the opportunities for the UK economy are even more significant. As world governments face up to these threats the economic opportunities for enterprises in developing low-carbon, low-resource use products and services and for Governments in developing low-carbon, resource efficient economies are immense. Smart approaches to globalisation will focus on getting growth from far less natural resources. Economies dependent on less resources will be in a better competitive position for example through being less susceptible to swings in resource prices which are likely to get more volatile.

  22.  It is not however enough for Government to just say that green growth is good. It will not happen unless green growth is actively promoted by Government through tax, spending and regulatory structures. This will mean pursuing both greener types of development option, and increasing the resource and energy efficiency of each of these options. On this latter point we again note the Chancellor's recent speech to the UN, where he stated:

    "Of course increasing labour productivity has always been a core goal of all successful businesses. Now as energy costs rise and materials become more scarce, we need to pay the same attention to resource productivity."

  23.  We hope that the Select Committee will ask the Chancellor to set out how he will drive forward this new resource productivity agenda.

(ii)  Retaining and attracting people

  24.  The UK Government believes that high-tech activities are the future for the UK—if this is so, the success of this strategy relies not just on retaining and attracting businesses to the UK, but retaining and attracting people to the UK. The highly-skilled workers delivering this GDP will also be increasingly mobile—and so the success of the UK will increasingly depend on the UK being able to offer a high quality of life to its citizens—otherwise they will leave. This analysis suggests that ensuring a high quality of life should be a central part of the UK's overall response to globalisation.

  25.  This is another argument that a focus on the quality of economic growth is essential. If we pursue growth paths which damage UK quality of life, it may bring short-term benefits, but will compromise the long-term economic outlook for the country. There is little point pursuing a growth strategy involving concreting over the south-east, if this means that the south-east will become so unpleasant to live in that people move abroad.

(iii)  Becoming a world-leader in renewable technologies

  26.  New technologies are needed to keep a global economy thriving within environmental limits. Already the environmental sector of the economy is of a similar size to aerospace and growing faster. By 2010 the global market for the sector is estimated to US$688 billion; in the UK the sector had a turnover of £25 billion in 2004 and employs 400,000 people.[58]

  27.  Renewable energy is predicted by the International Energy Agency and others to experience massive growth in the next 50 years. The UK has some of the world's best wave, wind and tidal resources, and engineering experience of sea conditions. Regulation plays a key role in the UK for realising these opportunities as the electricity market is mature, and it is very difficult for new entrants. Regulation and other intervention is essential otherwise the UK will not be a leader in these new technologies—which would be a huge missed opportunity.

(iv)  Resisting out-dated ways of "being more competitive"

  28.  The UK will almost certainly have a completely different make-up to its GDP profile in the decades to come. We should stop focusing on "traditional" ways of increasing productivity for existing types of growth, and focus on how to encourage new future forms of growth. Two examples of change required are:

    —  Reduced focus on physical infrastructure.

  29.  Growth has been seen traditionally as going in hand with more infrastructure—more houses, roads, airports. But there are diminishing returns for productivity improvements in many of these infrastructure projects, particularly on transport. And it is far more likely that future economic growth will be based on globalised information flows, rather than increased physical flows—given the imperatives of climate change and resource use, the overall dependence of global GDP on physical flows will increasingly be last century's way of delivering benefits.

    —  Seeing regulation and intervention as a stimulus to new, quality growth, not a brake on old-growth.

  30.  Currently new regulations are far too often wrongly seen in a negative light, and dismissed as a short-term cost to the economy. For example, stronger regulations for new houses were dismissed as putting too much on the cost of a new home. However, this was an entirely narrow and short-sighted analysis. Not only were the costs exaggerated, but the benefits—from cheaper fuel bills to householders, increased value for the homeowner, and reduced economic costs to the economy through less fuel use and reduced climate change damage—were all downplayed. Regulation will have an increasingly important role to give us strong, quality-growth economies. This applies both at the level of individual policies delivering efficiency, but also at the national level—some of the world's most competitive economies have the highest levels of regulation—for example Denmark and Finland, who use strong regulatory policies to drive innovation and quality growth.

Q3  Businesses: the relevance of globalisation to the Government's policies on:

Promoting innovation

  31.  Globalisation has placed in sharp relief the need for Government policies to consider the type as well as the amount of innovation in the UK economy. This is not to be prescriptive of the results of the innovation process, but to be clear and firm about the environmental limits within which our economy and the global economy operate. The opportunities for innovation in responding to the inefficiency with which natural resources are presently used and failure of economic policy to properly consider the value of the environmental systems upon which it relies, are immense. Government has a crucial role to play in providing those who contribute to the innovation process, most importantly the business sector, with a clear policy framework promoting high environmental standards. Providing such a policy framework in the UK will allow our economy to thrive in the context of globalisation.

  32.  There is a growing body of evidence that environmental regulation stimulates innovation. This in turn reduces the cost of compliance while delivering a range of wider benefits. According to a recent UK study,

    "Well thought out environmental policies provide opportunities for innovation, create new markets and increase competitiveness through greater resource efficiency and new investment opportunities. In this sense environment policies can help achieve the core [EU] Lisbon strategy objectives of more growth and jobs."[59]

  33.  This role for Government is also identified by progressive business. Chairman and Chief Executive Officer of General Electric, Jeff Immelt, observes:

    "Europe today is the major force for environmental innovation. We—General Electric—are therefore investing in environmentally cleaner technology because it will increase our revenue, our value and our profits [...] Not because it is trendy or moral, but because it will accelerate our growth and make us more competitive."[60]

The revised Lisbon Agenda for Europe

  34.  While stressing that inefficient regulations can impose a significant burden on business, the UK's Lisbon National Reform Programme also points out that

    "Effective and well-focused regulation can play a vital role in correcting market failures, promoting fairness and increasing competition. Society expects government to provide protection for the general public, consumers and employees consistent with the best international standards, and these expectations grow over time."[61]

  In relation to the environment, this means that it is important to ensure that high environmental standards in the UK and the EU are not jeopardised by the search for reductions in regulatory burdens. It also means that the European Union and the UK Government can see the swift development and deployment of policies to tackle greenhouse gas emissions decisively as entirely in keeping with the Lisbon agenda.

Design and level of business taxation

  35.  The nature of globalisation highlights the need for the UK Government to take heed once again of the large body of evidence showing that shifting business taxation off employing people and onto pollution and waste makes sense for the economy and stimulates innovation. This evidence has been used by previous Governments to bring in new environmental taxes (the Landfill Tax under the last Conservative government and the Climate Change Levy and Aggregates Levy under recent Labour government) along with cuts in employers NIC. Unfortunately the present Government turned its back on shifting business taxation with its hike in employers NIC. The Chancellor should as a matter of urgency in the context of the threats of globalisation reinstate a green tax-shift policy as a central part of climate policy and waste policy.

  36.  A good example of the benefits of green business taxation is the introduction in the UK in April 2001 of the Climate Change Levy. The levy provided the incentive—especially for high energy users—to look at energy use across their operations. A survey of businesses completed 18 months after the introduction of the levy,[62] found that it had raised awareness amongst senior managers about the need to address energy use and greenhouse gas emissions; helped change energy management policies; and increased the use of renewables. Crucially the survey found that though these changes had been considered before, it was the financial incentive brought by the levy that provided the immediate stimulus to the improvements.

Reducing the burden of business regulation

  37.  Although environmental regulation has economic as well as environmental benefits it should be designed in a way that minimises its administrative costs on business. It is in nobody's interest to achieve the same environmental outcomes at a higher administrative cost. Equally the economic (and environmental) benefits of environmental regulation such as stimulating innovation and investment in efficiency are improved by high environmental standards and proper enforcement.

  38.  In the context of globalisation, grasping the opportunities presented by high environmental standards must be a key element for a thriving UK economy. There is, however, currently a problem—the drive to reduce the administrative costs of regulation has spilled over into a deregulatory agenda which acts a blockage for developing and deploying better regulation.

  39.  As Porter and Esty found in a global survey of competitiveness lowering environmental standards and avoiding new necessary environmental regulation may have a superficial attraction but in make makes no economic sense as it brings no benefit to the economy as a whole and if anything acts a drag on competitiveness.

  40.  There are also significant problems with the current processes for policy appraisal. A key component of the better regulation agenda should be the systematic and thorough appraisal of the likely future costs and benefits of proposed regulations. In the UK, the system of Regulatory Impact Assessment (RIA)—introduced in 1997 primarily as a tool for assessing economic impacts on business—was extended in 2004 to take in the wider consideration of environmental, alongside economic and social, impacts. A similar, integrated system of impact assessment had been introduced by the European Commission in 2002.

  41.  Good policy appraisal is essential for better regulation—but is it vital that impact assessments are based on reliable data and cover not only costs, but all the benefits as well. A range of recent studies has concluded that in most UK and EU assessments the range of impacts considered is limited, and they downplay the environment in general and environmental benefits in particular. Impact assessments have also tended to focus on a limited range of economic impacts—mainly short-term costs to industry—while ignoring the economic benefits that can be derived from setting high environmental standards.

  42.  A recent study by the UK's National Audit Office of a cross-section of RIAs has highlighted their lack of balance. Five of the 10 RIAs examined gave "poor quality analysis of environmental and social impacts", while eight out of 10 exhibited "some weak elements" in this regard.[63] A review by the Danish Environmental Assessment Institute of 58 European Commission impact assessments showed that over half did not even consider environmental impacts at all.[64]

  43.  Apart from limited consideration of environmental impacts, a major weakness in UK RIAs has been the failure to consider adequately the economic benefits created by environmental protection measures. In particular, not one RIA has ever included an assessment of the impact of an environmental regulation on boosting the UK's environmental technology industry.[65]

  44.  Other economic benefits of well-designed environmental regulations are also often ignored:

    —  Improved health. One significant study by the UK's Environment Department concluded that a 0.75 µg/m3 reduction in airborne particles from additional measures would lead to a gain of between 278,000 to 508,000 life years for the UK population over the years 2010-10, together with significant savings in health care costs.

    —  Improved amenity. A study for the UK's Environment Department on the impact of the EU's Water Framework Directive concluded that in England and Wales alone amenity benefits could total as much as £1.9 billion. Maximum total benefits amounted to £6.1 billion.

    —  Economic benefits to third parties. Higher environmental standards can reduce the costs of damage to economically important ecosystems, agriculture, forestry and building materials (like stone, rubber and painted surfaces). One UK Government report on the impact of VOC emissions estimated their costs ranged from £170-£354 million a year.

  45.  As well as downplaying the economic benefits of environmental regulations, RIAs are often based on exaggerated estimates of costs to business, based on scare stories emanating from industry lobby groups. The Hampton Review—a review for HM Treasury on reducing administrative burdens—reported that a firm with over 50 employees would only spend two hours per employee per month on government regulation and paperwork[66]—and only a small proportion of this is likely to be in respect of environmental regulation. At EU level, more than 30 additional impact assessments of the Commission's REACH proposal on the registration of chemicals were undertaken by industry representatives. The Commission's Vice-President for Industry and Enterprise, Gu­nter Verheugen, concluded that most of their cost estimates were unreliable.

  46.  So, impact assessments as currently conducted in the UK and the EU give an incomplete picture of all relevant impacts, and undermine a key principle of better regulation—that policy-making should be evidence-based. In particular, assessments should take account of all the economic benefits that flow from high environmental standards, not least the boost they can give to competitiveness through increased resource productivity and eco-innovation. Scare stories on the costs of regulation should be checked against independent ex post studies of the actual costs and benefits of implementing higher environmental standards.

  47.  We hope that the Committee will recommend an overhaul of current processes for policy appraisal.

May 2006








54   Speech, 14 September 2004 Back

55   Millennium Ecosystem Assessment, 2005. Ecosystems and Human Well-being: Synthesis. Island Press, Washington, DC Back

56   http://www.sustainable-development.gov.uk/publications/uk-strategy99/foreword.htm Back

57   Daniel Esty and Michael Porter, Ranking national environmental regulation and performance: a leading indicator of future competitiveness? In: The global competitiveness report 2001-2002, OUP, New York, 2001. Back

58   The Environmental Industries Unit (DTI) http://www.dti.gov.uk/sectors_environment.html Back

59   Land Use Consultants Ltd (Dec 2005) The Environment, Economic Growth and Competitiveness: The Environment as an Economic Driver, a paper for the European Regional Policy Group, UK Back

60   Cited in Stavros Dimas, Member of the European Commission responsible for Environment (2005), Sustainable Development and Competitiveness, speech to the EPC Meeting, Brussels, 6 October Back

61   Lisbon Strategy for Jobs and Growth: UK National Reform Programme HM Treasury, October 2005 p 20 Back

62   Ekins, P; Monkhouse, C; Skinner, I and Willis, R (November 2002) Next Steps for Energy Taxation: A Survey of Business View, Green Alliance/Policy Studies Institute Back

63   National Audit Office Regulatory Impact Assessmentsd and Sustainable Development-Briefing for the House of Commons Environmental Audit Select Committee. May 2006 Back

64   Environmental Assessment Institute, Denmark Getting Proportions Right-How Far should EU Impact Assessments Go? April 2006 Back

65   Adrian Wilkes, Chair, Environmental Industries Commission Memorandum of Evidence for the House of Commons Environmental Audit Select Committee's Pre-Budget 2004 Inquiry, January 2005 Back

66   The Hampton Review-Final Report: Reducing administrative burdens: effective inspection and enforcement, Philip Hampton, March 2005, HM Treasury Back


 
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