UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 248-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

 

 

CLIMATE CHANGE AND THE STERN REVIEW:

IMPLICATIONS FOR HM TREASURY POLICY

 

 

Tuesday 6 February 2007

 

SIR NICHOLAS STERN

RT HON LORD LAWSON OF BLABY

Evidence heard in Public Questions 128 - 249

 

 

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Oral Evidence

Taken before the Treasury Committee

on Tuesday 6 February 2007

Members present

John McFall, in the Chair

Angela Eagle

Mr Michael Fallon

Mr David Gauke

Ms Sally Keeble

Mr Andrew Love

Kerry McCarthy

Mr George Mudie

Mr Brooks Newmark

John Thurso

Peter Viggers

________________

Witnesses: Sir Nicholas Stern, Head of the Government Economic Service, and Ms Lorraine Hamid, member of the Stern review team, HM Treasury, gave evidence.

Q1 Chairman: Sir Nicholas, good morning and welcome to the Committee. Thank you for coming a little earlier. I know that you have other engagements. Perhaps you would introduce yourself and the other witness for the record.

Sir Nicholas Stern: I am Nick Stern, head of the Government Economic Service. I led the Stern review on the economics of climate change. On my left is Lorraine Hamid, a member of the Stern review team. She worked in a number of areas but particularly in emissions trading schemes of various kinds.

Q2 Chairman: You have been called an idiot economist by the chief executive of Ryanair and, more importantly, referring to the evidence session that follows this, Lord Lawson in his CPS speech that the Stern review was scaremongering. He said: "If scaremongering seems a trifle harsh, I should point out that as a good civil servant he was simply doing his master's bidding." Lord Lawson goes on to say: "The voluminous Stern Report adds disappointingly little to what was already the conventional wisdom - apart from a battery of essentially spurious statistics based on theoretical models and conjectural worst cases. This is clearly no basis for policy decisions. . ." First, defend yourself on that; second, why is your review so important particularly in the light of the IPCC report?

Sir Nicholas Stern: Perhaps I may start with the key messages and where I think the review may have added some value. I am not here to say how important my work is; I am here to try to explain it and give an indication of its implications and what may be new. I shall deal with the criticisms you have described in just a moment. I do not believe that any of them has any serious foundation. The Stern review brought three things to the literature that in my view had not been given sufficient prominence in the past. The first was the economics and risk. Climate change is about risk and the appropriate analytical methods to bring to that are the economics of risk which look at the question: what kinds of risks can we avoid by action and what will it cost to avoid them? The economics of risk are an absolutely central question. I think that up to now it is disappointing that whilst the literature gives it some recognition it has not been given sufficient emphasis. The second is the role of international action and how to put it together. What kinds of actions in countries and groups of countries can best promote international action? I think that we had a stronger policy perspective on the international aspects of action than some other studies. The last thing is that we put the ethical questions at centre stage. If one is talking about making decisions now which have an impact over 50, 100, 150 or 200 years the ethics of how one makes judgments as between changes in investments in the next few years and their implications 150 years down the track raise some quite difficult questions. We felt that the economics of policy could not really be taken on without confronting those things. Therefore, in terms of approach there are three matters in the review that I emphasise as being new, at least in terms of emphasis. We are building on literature which is quite strong but in many ways in terms of economics is fairly new relative to the literature on other policy problems. I think it is fair to say that the science has gone ahead of the literature. I have spoken about where I think we have pushed things forward relative to the economics literature. We have not sought to push things forward relative to the science literature. We have been consumers of the science literature, but it has changed in the past five years in a very significant way from the point of view of what I have just described. The science literature is very old one. The greenhouse effect was first recognised by the French mathematician and scientist Joseph Fourier in 1820, so there is a very long history of the understanding that greenhouse gases in the atmosphere will trap energy in the earth and warm it up. But the significant advance in the science in the past five years from the point of view of our work as between the third assessment report and the fourth just published - I was in Paris for its publication in the past few days and had extensive discussions with scientists, particularly with French colleagues and policymakers - has been the probabilities. They can now give us some information on what would be the probabilities of different kinds of temperature increases if we stabilised at 550 ppm. In that case there would be a 50-50 chance eventually of it being above or below 3C. The science which gives us those probabilities enables us to put to work the economics of risk. We were consumers of the science and the way we used it was absolutely dead centre relative to what the science offered. But we were able to use it in terms of the crucial approach to analysis which is the economics of risk. Looking in a constructive way rather than being defensive relative to some of the things that you have described, I believe that the review has added something. That is certainly the view of a number of people in the European Commission, including President Barossa and Commissioner Dimas, and Jacques Chirac and Lionel Jospin who came to the seminars in Paris. It has been presented and appreciated in a number of other contexts, but it is not for me to say how important it is. I want to describe conceptually and analytically what it brought to the table.

Q3 Chairman: I am aware of the extensive visits that you have made worldwide and the impact and interest that has aroused. Since we announced this evidence session the IPCC issued its latest report on Friday. It argues that if CO2 rose to 550 ppm the earth's temperature would probably rise by about 3C which many scientists believe is unsupportable by society. What would be the economic implications if we adopted a much more ambitious target than the 550 ppm?

Sir Nicholas Stern: If I may just relate the temperature increases to the economics of risk that I have just emphasised, it is very important how we interpret those. First, the numbers that you quote are for 2100; second, they are at a distance from now, whereas the numbers we use in the Stern review are quite conventional and are relative to pre-industrial times. The difference between their numbers and ours is 0.7C for that reason. We were talking not only about 2100 but also the eventual temperature increases. I think it is extremely important to look beyond 2100 and ask what the eventual temperature increases would be. They would be higher than that. The third point is that in interpreting the IPCC numbers you have just described, the economics of risk are not concerned just with the middle of the range but with the risks that we run from the higher ends of it. The number that you quoted would involve a substantial risk of being above 5C eventually into the 22nd century, with the probability of it being still higher than that. An increase of 5C is earth-transforming; it is the difference between where we are and the last ice age. That transforms how and where you can live. That kind of temperature increase would very likely involve substantial movements of population and potential conflicts. We are already seeing that with a 0.7C increase in Darfur. There are many reasons for the conflict, but that is due in part to the movement of pastoralists and the difficulties they encounter with agriculturalists. Given those population movements that we see at 0.7C, an increase of over 5C, again using the convention adopted in the review which is related to pre‑industrial times, is a very serious risk. We said in our review that we recommended that the target range for public discussion should be between 450 ppm and 550 ppm. We argued that 550 ppm given the risks it involved would be the highest level that it would be sensible to contemplate given there was a 50-50 chance of it being 3C above pre‑industrial times and the real risks involved in that. In all this I am talking about CO2 equivalent, that is, CO2 plus the other greenhouse gases. We will be at 450 ppm in less than 10 years. Currently, we are at 430 ppm CO2 equivalent; it is around 380 ppm for CO2 and one adds another 50 ppm or so for the other greenhouse gases. We are adding 2.5 ppm per year and that 2.5 ppm addition is rising. Perhaps in about eight years we will be at 450 ppm. Once the stuff is up there it is very difficult to get it out again. Some of the non‑CO2 gases fade quicker than CO2 which can last hundreds of years. It is a ratchet effect. The flow goes into the stock and the stock is difficult to bring down. Therefore, we are almost at 450 ppm. That was how we arrived at the range we proposed; that is, between the 450 ppm which we are already near and the 550 ppm which seems to be the upper limit that we would want to contemplate.

Q4 Chairman: You have said in your report that what we do just now will not affect what happens in 40 or 50 years but what we do now can affect what happens in 80 or 100 years. How can we get that through to the public? To what extent do you think the public is prepared to contribute seriously to tackling climate change, and what language or methods do we use to reinforce that message?

Sir Nicholas Stern: Obviously, it is much easier to understand that one has a problem with congestion in London when one sees cars slowed to a walking pace. One sees it now. This is a different kind of problem as you emphasise. I think that it involves analysis of the kind that we have tried to bring to the table. It involves teaching in schools and communications in the media. People like David Attenborough and Al Gore have been very good at communicating. Nicolas Ullo in France has made an extraordinary contribution. Last Wednesday he called the candidates in the election together and asked them to sign an ecological pact, which they did. It needs communication in the media and also political leadership. There is no magic language.

Q5 Mr Newmark: I want to focus on some of the criticisms of your work that have been made. Some economists have questioned the appropriateness of the rate that you use to discount future costs or benefits of future generations as a result of climate change. Most of these critics argue that the rate is far too low. I think you have taken 0.1% which magnifies the future costs that you estimate we need to mitigate against. How do you defend your use of a 0.1% discount rate?

Sir Nicholas Stern: Most of those studies, and the way you put the question, do not get to grips with the meaning of what discounting does. Basically, there are two things to understand at the beginning. This is a technical question and I have to take a minute to deal with it.

Q6 Mr Newmark: In answering it, can you say why using the Treasury green books with a preference rate of 1.5% is completely inappropriate?

Sir Nicholas Stern: I will give a brief answer. The discussion is in the appendix to chapter 2 of the report. I think that that makes clear the relationship about which you have asked me. In simple form, there are two reasons for discounting. One is that in future people may be better off than we are currently. An extra unit of stuff to them has lower ethical value for that reason. They will be richer, and that is absolutely dead centre in the review. The review does have discounting for the fundamental reason of growth. What we do in the review is take on the issue of how far we should discriminate between people by date of birth. The number that you are talking about applied to this particular case. If you use 1.0% or 1.5% you will be saying to somebody who is 50 years younger than you in the social analysis we are carrying out, "You have half the weight of me." I think that is an ethical position that is extremely hard to defend. The way in which we describe the discount rate that we use, which is fairly standard at least among people who have looked carefully at discount rates, is that account must be had of the possibility that what you are studying - it could be a railway project or some other investment project - becomes irrelevant for a number of different reasons, such as a complete change in policy or total redundancy because of technical change. If one is looking at a cost benefit analysis from the point of view of the planet, it is much more difficult to make that case.

Q7 Mr Newmark: I appreciate that it is a complex issue and you have given a long answer, but we are trying to relate it to ordinary people. Future generations in simple terms will be much richer than us. Part of the criticism is that you are asking today's generation to take on an unduly enormous part of the burden when future generations may be wealthier and the relative cost to them as opposed to us today will be less. There are a number of disaster scenarios in other areas we can look at despite climate change, which is an important issue.

Sir Nicholas Stern: That is just wrong.

Q8 Mr Newmark: That is the criticism being made.

Sir Nicholas Stern: I am trying to explain why it is wrong. The discounting for growth because people will be better off than we are now is in the review and it takes place in exactly the same way as the Treasury defines it in its standard text. The difference between the way in which we and some others have done it in the past is not for that reason of discounting which is absolutely dead centre there. The way you have described it is just wrong.

Q9 Mr Newmark: That is the way people perceive it.

Sir Nicholas Stern: Then you must read the report carefully. There is a clear conceptual difference. The pure time discount rate is a different concept.

Q10 Mr Newmark: I understand that.

Sir Nicholas Stern: That discriminates people by date of birth.

Q11 Mr Newmark: I think that you are employing ethical overlays in what you are doing. You have used a 0.1% discount rate. The lower the discount rate used the higher the cost today. Using a 0.1% discount rate by definition creates enormous cost. If you look at your technical annex to the postscript you lay out some sensitivity analyses regarding discount rates. To what extent have these answered your critics that a discount rate of 0.1% is inappropriate?

Sir Nicholas Stern: First, I cannot accept the logic that a 1.5% discount rate is inappropriate. You keep dismissing the idea of discounting for growth.

Q12 Mr Newmark: You keep saying "you". There are a number of people who make that judgment.

Sir Nicholas Stern: It is just that we are talking to each other. The discount rate that you are talking about is a pure time discount rate that discriminates between people without any regard to wealth and income; it is purely to do with date of birth. If you are doing your cost benefit analysis at a planetary level, which is what we are doing here, that reason for discounting seems to me to have little justification. We are in pretty good company here in that Solo, Sen, Keynes, Ramsey and all kinds of people have adopted the approach to pure time discounting that we have adopted. It is not particularly unusual.

Q13 Mr Mudie: Does the Treasury collect data on the total amount of government expenditure, both current and future, on measures to enable climate change adaptation?

Sir Nicholas Stern: I really cannot speak for the Treasury on this. I believe that John Healey is coming tomorrow.

Q14 Mr Mudie: Were they doing it when you were there?

Sir Nicholas Stern: I do not have detailed information on that.

Q15 Mr Mudie: What more might the Government do to ensure there is a supportive environment for adaptation to climate change within the UK?

Sir Nicholas Stern: As to adaptation, the basic information is of enormous importance. Quite a lot of work is going on in that respect. For example, Sir David King's group at the Hadley Centre in Exeter, which is a world-class centre for the analysis of climate change, has been looking at the kinds of impacts that might take place in the UK. The information that these people are putting out about consequences for the UK is absolutely fundamental. For example, it is likely that the south of England will have much wetter winters and dryer summers which would put a great deal of pressure on the London sewerage system. The storm surges up the Thames are likely to be much more severe. Heat stress in the summer with implications for the London Tube is likely to be much more severe. That is the kind of information that one needs to have in order to think through what kind of adaptation investments might be necessary. Another area is sea defences. One needs strong local information to do that. I believe that that is being built up, but it is not something in which I have specialised.

Q16 Mr Mudie: How far would you allow adaptation to be used as a proactive choice in combating climate change as opposed to mitigating emissions?

Sir Nicholas Stern: I would not put it as a horse race. I think that both of them will be important. As I said at the beginning, some significant temperature increases are on the way because of what we have done in the past. We have seen 0.7C relative to pre-industrial times. In all likelihood even if we act very strongly we are likely to see somewhere between 2C and 3C. One hopes to keep it lower than that, but that is the kind of thing one must envisage.
That means it is three or four times what we have seen. That is coming because of past action, even if we act strongly now. Adaptation is very important, particularly for developing countries. That is why we laid such stress in the review on the importance of rich countries meeting the commitments that they made in 2002 in Monterrey and 2005 in the EU Gleneagles meeting on support for developing countries because they will be hit the hardest and earliest. But adaptation as already referred to in the London examples will be important round the world. We have to do both. I think that to see adaptation as an answer to a risk of a 5C or 6C increase is not realistic given the magnitude of the implications for the political and human geography of the world.

Q17 Mr Mudie: One of our witnesses, Kate Hampton, said that adaptation tended to be used as a card played by countries like the US and Saudi Arabia as a way to divert attention away from mitigation and she believed that that had slowed down intelligent debate on adaptation. Without regard to the criticism of the two countries involved, do you think that has happened?

Sir Nicholas Stern: One can talk about the importance of adaptation without casting aspersions on the motives of players who talk about it. I spoke to the heads of state of the African Union in Addis Ababa last week. For them adaptation is a very big issue. They have already seen desertification and conflicts in Darfur, floods in Mozambique in 2000 and the droughts in Kenya in the late 1990s. For them adaptation is a reality; they have to face it and we should do all we can to support them. Therefore, adaptation is of fundamental importance. I also think that mitigation is of fundamental importance. I do not see one as a conspiracy against the other.

Q18 Peter Viggers: Weapons available to government include regulation and tax, but one weapon that is much discussed in your review is carbon emission trading. Can you say a word about the advantages of this and the prospective dangers and difficulties of it?

Sir Nicholas Stern: I think that all three have a role to play. One has to look at the circumstances of the industries, goods, activities and countries. There are some countries which find taxation less easy than regulation. The US is probably such a country. There are cultural and political backgrounds in different countries which lead to different areas. If one looks at the European Union emissions trading scheme which is the biggest and most important example and is probably the right vehicle to start to answer your question, that covers about half the emissions in Europe. It is clear that if one goes for the big industries in terms of putting trading schemes together one can get quite big coverage. For me, the most important advantage of trading schemes is that it is a way of promoting carbon financial flows to developing countries. For a lot of my life I have worked in development; I have spent more than 30 years in India and nearly 20 years in China. The intensity of their feeling about the inequity of this problem must be recognised and understood. They see the rich countries as being responsible for sticking the lion's share of the greenhouse gases up in the atmosphere and themselves as being hit earliest and hardest. They look to the rich countries for help not only with adaptation but with finance for the extra costs of moving to low-carbon economies. An advantage of trading is that it can help generate those private flows of finance. We already have the beginnings of that in the clean development mechanism and we argue in the review that we should move to a scaling up of those kinds of activities. The advantage of tax is that where you do not have a collection of big industries with easily measurable emissions it is easier to tax goods and so on, and it is a decision that can be taken in just one country. There are advantages to tax in that context, but there are disadvantages in trading. I particularly emphasise the international nature of it. It allows the European Union, for example, to collaborate well in a way that may otherwise be difficult and it allows flows to developing countries. One has to look at different parts of the economy and different groups of countries. I have not said anything about regulation, but I also believe that that is an important part of the story.

Q19 Peter Viggers: The Institute of Fiscal Studies has said that emissions trading may not work properly if there are imperfections in the market for permits to pollute. Do you believe it is possible to design a scheme that irons out those imperfections at this point, or is it something that will need to evolve, and who will supervise it?

Sir Nicholas Stern: I think we are learning fairly quickly. These are early days. Emissions trading in Europe has been going for only a couple of years. I think that we are moving into a good discussion of the third phrase of the emissions trading scheme from 2012 to 2020, so we are learning quite quickly about how to make it work. It must have scarcity if it is to work. If one dishes out far too many permits one will drive down the price and it will not work. One must have reasonably strong ambitions, and one must also have ways to verify emissions which is also an important part of that story. One needs an institutional structure to support the market, just as one needs an institutional structure to support trading with developing countries. Currently, that is the clean development mechanism which is a rather cumbersome institutional structure. But these are early days. I think we are learning quite quickly. I have been impressed by how rapidly that learning process has gone ahead given that it has been going for only a couple of years.

Q20 Peter Viggers: Is the system socially neutral? Does it disadvantage poorer households and, if so, what can be done about it?

Sir Nicholas Stern: Any scheme that relies on price - it is the same as tax - can be seen to bear more heavily on poor households, but that is true of the price mechanism wherever one looks. The efficient way to deal with those kinds of problems is not necessarily or usually to vary the prices that people pay in this context but to look at income tax and other systems for the right way to distribute income. For example, we give old people heating allowances as a way to try to deal with the cost of heat rather than necessarily lowering the price of heat for them. The question you ask is a very general one and in terms of public policy we have a general approach to it. A final point to make on trading schemes is that over time we should start to look at auctioning the permits, not simply giving them away. There is a process of transition; one has to get there. One can understand why one would do that at the beginning. That is a feature that we must discuss.

Q21 Angela Eagle: Although the European Union emissions trading scheme is the most advanced in the world, it has not created scarcity, has it? It is only the UK that has issued stringent permits, whereas in Europe they have just issued permits that equal the emissions already being made, so there is no downward pressure. We are the only country that has looked at creating scarcity, the net result of which has been a transfer of hundreds of thousands of pounds in funds from the UK to the EU as our industries have sought to purchase the permits that they need to carry on as before?

Sir Nicholas Stern: I have said that we are in the first couple of years of this and the lesson of giving away too many permits in the early stages is being learnt. That is why Commissioner Dimas has made a strong case in the second round of the national allocation plans for much more stringent allocations. That is something that will move forward. I agree that that was a mistake in the early days but I trust that that is a mistake which is being learnt. Certainly, Commissioner Dimas who is responsible within the commission for dealing with this area of activity has taken this very much on board.

Q22 Angela Eagle: But that means two years have been wasted in a sense. It is good that an infrastructure is being created, but we do not have that many years if the reports we are reading are accurate to try to get an emissions trading system that is global and works. What sort of infrastructure do you see having to be put in place globally to make a carbon emissions trading system robust and able to create scarcity as you put it?

Sir Nicholas Stern: If we look at the length of time it has been in place we are learning quite quickly. In the spring council of the EU the ambitions for the period 2012 to 2020 will be discussed. There have been strong proposals by Commissioner Dimas and the Commission as a whole, strongly supported by President Barossa, for a reduction of at least 20% by 2020.

Q23 Angela Eagle: But in essence the EU has an infrastructure that is political even if it is controversial in some areas. The rest of the world does not have an infrastructure of governance that is robust enough to create a global emissions trading system. How do you envisage that being set up in the time we have left to deal with this effectively?

Sir Nicholas Stern: The challenge is to build that. This is not the only policy framework that we are talking about.

Q24 Angela Eagle: But it is an important one, as you highlight in your review?

Sir Nicholas Stern: It is a very important part of the story. I believe that we can move quite quickly on developing a much stronger infrastructure in the clean development mechanism which would support exchange through the markets between rich and poor countries. You identify a challenge. I think that is a challenge, but we can respond to it. If you say it is hopeless than you need to find some other way. I am not all that confident that if we throw away the tools we have we can use the other ones to the right kind of effect. If you look at the way the discussion is moving, the discussion on how to link up with California has begun. A real development in the past few months is Australia's discussion of emissions trading schemes. As those build up in different countries it is very important to look very closely at the nuts and bolts and design of these things - often the devil is in the detail - to see how they can link up one with the other. But I am confident that we can move forward on the CDM which is a big part of the story.

Q25 Angela Eagle: You have described the issue of climate change as the greatest market failure that the world has ever seen. You say that some market mechanisms can be introduced to help to deal with it, but Lord Lawson who is to give evidence later today described your report as "a battery of essentially spurious statistics based on theoretical models and conjectural worst cases. This is clearly no basis for policy decisions which could have the most profound adverse effect on people's lives, and at a cost which Stern almost certainly underestimates." What do you say to him?

Sir Nicholas Stern: I think that is name-calling without substance. I can go through all the criticisms one by one, if you want me to.

Q26 Angela Eagle: He describes the idea of a Kyoto-style agreement with carbon emissions trading schemes which we have just been talking about as "capricious and corrupt" because it is a rationing system. What do you say to that?

Sir Nicholas Stern: It is not a very analytical use of language and I do not think it bears scrutiny, frankly. The emissions trading scheme works in the EU, if you look at its two-year history. We are learning from the process as I have just described. I think we can do it better, and we are starting to do that. We are looking at the clean development mechanism process. We are beginning discussions with developing countries on lots of ways to improve that and scale it up. It is not capricious. I would have thought that Lord Lawson would take markets seriously. If you inflict a cost on others through your action, be it through congestion or pollution, that is a market failure and making markets work well involves correcting them through tax, regulation and the trading schemes that we have been discussing. That is not capricious; it is serious market analysis.

Q27 Kerry McCarthy: In terms of establishing a global emissions trading scheme, what do you think is the biggest challenge in persuading the US or developing countries to come on board?

Sir Nicholas Stern: They are both big challenges. The clean development mechanism has been the initial step for developing countries becoming involved in trading. I do not believe that at this stage in the discussions - I have worked closely with many of the key developing countries involved - it is reasonable to expect those countries to take on national caps. But we can have a discussion - I think it is beginning - on developing sectoral and technological benchmarks against which reductions can be recognised. I believe that that is a way forward in amplifying the trading that already exists with developing countries. In the United States in the next two years the north eastern states will be introducing a trading scheme. There are discussions in California - I shall be there at the end of March - about how to link up trading schemes there. We have to work with countries which are putting individual trading schemes in place - Australia is studying them - to see how we can best link up. If you look at the United States, there has been extraordinary movement in the past six months or so: for example, the re‑election of Governor Schwarzenegger, which in large part was on a climate change platform; the 10 big firms that wrote to President Bush ahead of the State of the Union Address asking for a cap and trade scheme; the ambitions of individual US firms and cities; and the new chairs of the Energy and Environment Committees, Geoff Bingham and Barbara Boxer who both take this issue seriously. Next week I shall be giving evidence to
Senator Bingeman's Committee in Washington. I believe that discussion in the United States is moving strongly. It is quite possible that in the next presidential election there will be two candidates representing the major parties both of whom are committed to taking this issue seriously. The US will make up its own mind. It is not for us to tell the United States, India or China what to do; it is up to us to try to engage intelligently on issues, and I trust that is taking place.

Q28 Kerry McCarthy: What steps can the UK take? What mechanisms and forums should we be using to try to win the argument on a global basis?

Sir Nicholas Stern: I do not particularly like language that is about winning and losing. I think that the challenge is one of building consensus and co‑operation. Next week there will be global parliamentary event in Washington hosted in part by John McCain. A number of parliamentarians from the UK will be there. I am participating in that event. These are the kinds of events involving parliamentarians as well as academic that can push forward the argument. Next week I shall be taking part in an extended seminar at the University of Yale and sharing these issues with academics. If we share information as parliamentarians, academics and communicators that is the way to take forward these arguments. If you consider the movement around the world - India, China, the United States, Australia, Japan and Europe - wherever you look the argument is moving strongly. Whether it will move fast and effectively enough I do not know, but it is moving strongly in the right direction.

Q29 Kerry McCarthy: It sounds as though you see it very much in terms of debating the issues and making the case rather than any other mechanisms that may force people or give them financial incentives to act differently. In particular, when you look at our trade with developing countries you do not believe that conditionality in terms of the environment or anything like that should be built into it, and it is more a matter of discussing with them the scale of the issue?

Sir Nicholas Stern: I think it is a matter of making the case. I have already emphasised the importance of overseas aid to adaptation, which is a big part of the conclusion of the review, building incentive structures through trading systems and sharing technology. It comprises all these things beyond simply discussion, although discussion is an important part of the process. If one looks at aid, sharing technology and trading mechanisms all of them are direct practical methods to take forward the whole case.

Q30 Kerry McCarthy: But you see the way forward as carrots rather than sticks?

Sir Nicholas Stern: International sticks are quite difficult to operate. For example, I would be wary of green protectionism. I have seen some of the costs of protectionism around the world. At some point one could think of sanctions of various kinds, but they would be difficult to make stick and would run the risk of being divisive. At this stage of the discussion I would prefer to try to look to incentives and the building of co‑operation.

Q31 Mr Fallon: Why does the Treasury define environmental taxes as only the climate change levy, the aggregates levy and landfill taxes but not taxes on energy and road vehicles?

Sir Nicholas Stern: I am not here to speak for the Treasury.

Q32 Mr Fallon: I thought you were head of the economic service?

Sir Nicholas Stern: Yes, but the Government Economic Service cuts across the whole of government; it is not a Treasury service.

Q33 Mr Fallon: What is the answer?

Sir Nicholas Stern: My own view is that an important part of taxes, for example on petrol, should be seen as environmental taxes. If one looks at the reasons for taxing petrol, they are: the environment, a partial substitute for congestion and a means of raising revenue as any other tax is. I think that there is an important environmental tax associated with petrol.

Q34 Mr Fallon: You do not agree with the Treasury on that. Is air passenger duty an environmental tax?

Sir Nicholas Stern: I have said there are a number of reasons for taxation: externalities, the environment and congestion. Are they good or bad ways to raise revenue more generally?

Q35 Mr Fallon: I understand that. Is it an environmental tax, or not?

Sir Nicholas Stern: Some elements of it, yes, but one cannot necessarily say that this particular proportion is for the environment. As an economist I would regard some element of it as an environmental tax.

Q36 Mr Fallon: Would it affect consumer behaviour?

Sir Nicholas Stern: If you believe that prices affect behaviour, as I do as an economist and as I believe you do as a consumer, it will have some effect on behaviour. The price goes up and demand goes down.

Q37 Mr Fallon: Do you expect fewer people to fly as a result of the increase in air passenger duty?

Sir Nicholas Stern: Compared with what would otherwise have been the case, yes. If one put up the price of bananas one would expect demand for them to go down relative to what would otherwise have been the case.

Q38 Mr Fallon: Do you believe that air passenger duty is the best way to influence airlines' emissions practices?

Sir Nicholas Stern: It is one way. At the same time, there is very intensive discussion, rightly in my view, about bringing air travel into the EU emissions trading scheme. I think that is a very important idea.

Q39 Mr Fallon: If air passenger duty is only partially an environmental tax can we assume that the rest of it is designed simply to raise revenue?

Sir Nicholas Stern: Any tax has a revenue element. After all, this is the Treasury Select Committee.

Q40 Mr Gauke: Your worst case estimate for mitigation policy packages adequate to cap CO2 at 450 ppm is 3.4% of global output, and in table 10.1 you set out a number of best case assumptions that reduce the figure, the largest of which is active revenue recycling. What does "active revenue recycling" mean?

Sir Nicholas Stern: First, we are quite cautious about assumptions about the cost of achieving 450 ppm. Whilst it is still difficult it is easier to get estimates on 550 ppm than 450 ppm for the reasons I gave right at the beginning of my evidence. Various people - this story is discussed in the report - look at recycling of revenue in terms of advantages from reducing taxes elsewhere, so if one raises more revenue in one place one has revenue to spend on schools, roads, hospitals or whatever it may be, or one can reduce taxes elsewhere. The language of revenue recycling has been used by a number of authors. I believe that at that point we were referring to the analysis of other authors. I approach the idea of revenue recycling with some caution because its benefits rather depend on what kind of tax structure there is and whether there is a move from a tax which has some real problems to another tax which has more or fewer problems. How one sets that up can make quite a big difference to what it means. We counsel some caution on the use of revenue recycling.

Q41 Mr Gauke: Are you referring to the tax integration effects and so on? There has been some criticism that your review does not take that into account. Is that a fair point?

Sir Nicholas Stern: The words "revenue recycling" usually mean reducing taxes elsewhere and counting some benefits for that. In the report we are quite cautious about it, although we note that some estimates in the literature have leaned on that. It is not something that we emphasise very strongly.

Q42 Mr Gauke: But you refer to it at 1.9.

Sir Nicholas Stern: That is because we are quoting other people's results at that point. This is a review and we are trying to look at what others have contributed.

Q43 Mr Gauke: Is there a concern that if one takes air passenger duty one can ask: where is the revenue recycling there? It is simply a cover for increased taxes. Do you recognise that concern?

Sir Nicholas Stern: Any tax raises revenue and when that happens there are the usual political choices that any government at any time faces. For example, do you use that revenue for extra expenditure? Do you use it to reduce borrowing? Do you use it to reduce taxes elsewhere? Any tax produces that set of questions, and this is no different.

Q44 Mr Gauke: Looking at mitigation as a whole, in your analysis to what extent have you looked at the costs and benefits of past and current policies as far as global warming is concerned?

Sir Nicholas Stern: Referring to the two sources of our estimate of the cost of mitigation, which like all these things has big pluses or minuses attached to them, one is the work of recently retired Dennis Anderson, professor of economic energy policy at Imperial College London. He did a bottom-up study based on the kinds of costs associated with different kinds of technical change, including past experience in terms of what the costs of activities were then and some emphasis on past experience as described in learning curves and how people learn over time. That was one source of views based heavily on past experience in those two senses. Second, we asked Terry Barker of the University of Cambridge to review all the relevant literature. There have been lots of studies by others. Those were the two sources that we used for that purpose. In terms of Terry Barker's work, the answer to your question will depend on how far that myriad of individual studies to which he referred is based on past evidence. Normally, if one conducts econometric work and fits cost estimates to data it will comprises past costs of various forms of activity and so one has to lean on that to a large extent.

Q45 Mr Gauke: How and when did you learn that you would be working with Colin Challen on climate change issues?

Sir Nicholas Stern: In what sense do you mean?

Q46 Mr Gauke: I understand that Colin Challen will be working closely with you on climate change issues, so I am just interested to know when you learned of that appointment and precisely what you will be doing together?

Sir Nicholas Stern: My understanding is that we are looking at some ideas on how economists and parliamentarians can talk to each other. Maybe this morning's meeting is a good example. Colin and I have not had an opportunity to get together and work out the details, but I am very happy to do it. Colin and I will get together to think through how we can best construct a gathering of parliamentarians and economists some time in the autumn. I hope that those parliamentarians will come from different parts of the world and will be associated in some way with the Commonwealth.

Q47 Mr Gauke: I know that he has as long-standing interest and expertise in this area. Was it the Chancellor's appointment?

Sir Nicholas Stern: The Chancellor asked me if I would be interested in doing this and I said that I was.

Q48 Mr Gauke: But was Colin Challen his appointment?

Sir Nicholas Stern: Yes. I learned about it from the Chancellor and I thought it a good idea. I shall be back at the LSE from June. I said that I would be very happy to take part in something like that in the autumn.

Q49 Chairman: Colin Challen is the chair of the All-Party Parliamentary Climate Change Group.

Sir Nicholas Stern: Yes. I do not know him well but I know him, and I am looking forward to this collaborative work.

Q50 Ms Keeble: According to the ONS the proportion of total tax revenues made up of environmental taxes has fallen almost every year since 1999, and it is now down to 7.7%. What does that data tell you? In particular, what does it tell you about the ability of government to mitigate climate change by taxation?

Sir Nicholas Stern: First, I have not studied those ONS calculations. I think I made clear in my answer to a previous question that classifying an element of a tax as "environmental" is quite a difficult thing to do given there are several arguments associated with any given tax. Identifying the environmental tax element is not straightforward. I cannot really comment on the trend without looking carefully at the definitions. Tax is just one tool.

Q51 Ms Keeble: You identified three ways to mitigate climate change: trading schemes, which we have discussed at some length, taxation and regulation.

Sir Nicholas Stern: That is on the price side. In the report we also identified a number of other ways: the promotion of research, development and deployment; deepening people's understanding of the problem; looking at the way in which other markets work, for example property markets and so on; encouraging energy efficiency in various ways; and deforestation. In referring to those three things I was focusing on the market failure price element.

Q52 Ms Keeble: If one looks in particular at taxation, how do you believe governments can use that tool? Taxation can affect a number of the other issues that you mentioned, for example deforestation. How do you see government being able to use taxation given what is seen as the general unpopularity of green taxes?

Sir Nicholas Stern: Nobody likes taxes for understandable reasons. There are many different reasons for taxing. One can talk about externalities, the damage and bad side of the story; one can talk about taxes that are easier to bear, or are more equitable or easier to administer. All of those involved in public finance must look very carefully at all these different reasons. That is why I have said that identifying a tax as an environmental tax is not easy. To come back to the question of discussion of ideas, I do not see why people would be more opposed to a green tax than any other tax. I would have thought that on balance if we talked it through well and there was an additional special reason associated with the environment, added to all the other reasons for choosing the real balance of taxation, over time people would be more persuaded by green taxes than by others, but the case has to be made in the context that people do not like taxes.

Q53 Ms Keeble: I should like to put two questions. First, do you accept that a green tax is a tax on consumption that can be seen to be regressive? Second, to pick up your point on Darfur, do you accept that although there may be climate change factors in the movement of people that is a bit of an easy cop-out for some disgraceful behaviour by government? This was wholly preventable and it is not wholly accurate to put it under the heading of climate change. My main interest lies in the first question.

Sir Nicholas Stern: I can answer the second one very quickly. I was very careful to say that it was one of the factors. Last week I was with the heads of state of the African Union in Addis Ababa and these were the kinds of discussions that we had then. People in Darfur much closer to the ground than either you or I had the view that this was an element in the story. I do not put it under that heading. On the green tax side, I come back to the point that I made right at the beginning. This one element in the armoury. I believe that if we had discussions with people they would understand it. Any use of a price mechanism wherever one looked, whether it be bananas, externalities, climate change or congestion, would have some distributional consequences. The Treasury Select Committee or public finance economists normally take that into account in the whole range of tools. That is why one looks at transfer schemes, pensions and the progressivity or otherwise of every tax. One has to see taxes in their entirety to make judgments about progressivity or not. I do not believe that it is right as an analytical and policy point to pick them off one by one.

Q54 John Thurso: I should like to pursue the question of the effectiveness of environmental taxation in achieving behavioural change. To what extent would it help if green taxes were ring-fenced or hypothecated to a perceived good in helping the public to swallow them?

Sir Nicholas Stern: You are politicians. Again, I do not like language like "helping the public to swallow them". I think that we are trying to have an intelligent discussion of what are good forms of taxation and what are more and less acceptable ways to deal with the problem. I think that the green tax story is an important part of it. To change people's attitudes is a very important part of the discussion. Economists tend to discuss, as here, sticks and carrots. That is our stock-in-trade and we forget it at our peril. If one says that sticks and carrots are unimportant one gets into all sorts of trouble. Far be it from me to move away from those, and we do not do so in the review. But to change people's attitudes to what constitutes responsible behaviour through public discussion, the interchange of ideas, the sharing of analysis and political leadership are all important matters. If one looks at recycling, 20 or 30 years ago most of us probably did not do very much of it but we discussed it and government made it easier so to do. Nowadays many people recycle. Most people do not have much of a financial incentive to do so; they do it because it is the right thing to do.

Q55 John Thurso: They get an incentive now; they are fined if they do not do certain things.

Sir Nicholas Stern: I was looking backwards. For the most part of the story, there has not been a direct financial incentive. People's view of what constitutes responsible behaviour is part of the story and it should be part of the public discussion.

Q56 John Thurso: There is quite good polling evidence to suggest that the vast bulk of people accept the danger of climate change; they believe it is happening and want to do something about it. About 70% of people accept that there should be taxation on the bads, as it were. That breaks down when it is directly applicable to them, one obvious example being petrol duty. For a tax to work in changing behaviour, as opposed simply to raise revenue, there must be an alternative place for them to go to acquire the goods. Therefore, whether one looks at APD and transfers it to the airplane rather than the passenger, or road tax and transfers it to road user charging, one has to structure something that people can move to. Do you concur with the view that we need to change the mechanisms to make it easy for people to change their behaviour and that the current structures are not geared to changing behaviour?

Sir Nicholas Stern: I think we have to look at ways to help people change their behaviour. Obviously, in the recycling story it is rather simple: you make the bins available and collect them in a convenient way. In this case we have to take a long view. These are changes in the pattern of behaviour that will take some time to have an effect and the technologies that are likely to be available to support it will take some time to come through. For example, if we take a 20 or 30-year view of the future of road transport, electricity - of course, there must be electricity from non-carbon sources - and hydrogen are likely to be important sources. We will see as the technologies develop. But that is why in the review we have placed strong emphasis on encouraging technological development. That is part of the story of making available to people alternative technologies. People can do quite a lot right now in terms of energy efficiency, for example insulation, light bulbs and so on. But those light bulbs need to be available. I talked to Terry Leahy and people from Tesco on the challenge of how to make these new technologies more easily available to people and how quickly those kinds of light bulbs can be brought to the shops in a convenient and attractive way. One has to do the promotion not simply through price systems or trading mechanisms. In some areas regulation and standards will be important in pushing that story ahead. I believe that regulation and standards, promoting technology and encouraging the easier availability through retail outlets and so on, are all ways to pick up the very fair question you put, namely how to make it easier for people to change.

Q57 John Thurso: We agree that taxation is not the whole answer by any stretch of the imagination but it is part of it. If there is a financial incentive to change and there is somewhere to go one is more likely to change. For example, what would be the consequences of a fairly substantial cut in income tax and an equivalent rise in taxation on the consumption of pollutants, to put it in shorthand?

Sir Nicholas Stern: Consequences for what?

Q58 John Thurso: To help people shift towards less polluting behaviour?

Sir Nicholas Stern: It is not clear to me how much a cut in income tax would contribute to that. I know that we have been discussing the role of price.

Q59 John Thurso: The cut in tax would be allied to an equal rise in the taxing of bads, to use shorthand.

Sir Nicholas Stern: I think that the key factor in that context is what happens to the cost of the bads. I do not see much reason why adding income tax to it will make a change.

Q60 John Thurso: You believe that we should concentrate on taxing the cost and not worry too much about the other side?

Sir Nicholas Stern: The other side is a matter that you should be worrying about all the time as the Treasury Select Committee. What do you do with revenue? What do you do with expenditure? You look at it and allocate it.

Q61 John Thurso: I was thinking about this context.

Sir Nicholas Stern: I was engaging in discussion, not wrist-slapping.

Q62 Mr Love: One of the complaints made about your review is that it should have been more egalitarian between the rich and poor, effectively that you have underestimated the value of extra money to the poor. How do you respond to that criticism?

Sir Nicholas Stern: I spent most of my life working on the economics of developing countries and I believe that that shows in the review. I do not accept that criticism as a reasonable one. If one looks at the way in which the review is written, it places very strong emphasis on the damage that will be suffered by the poor countries earliest and strongest; it places very strong emphasis on the importance of the rich countries stepping up to the commitments to overseas aid that they have made because of the extra pressure that challenge of climate change will exert on development. The later chapters of the review also place great stress on the importance of rich countries in the context of the world reduction of 30% of greenhouse gases by 2050 and the rich countries taking responsibility for cuts of 28%. In the analysis in chapter 6 we do not build into the formal analysis the explicit welfare wage between rich and poor, but the reason we move from the highest estimate of 14% in the model to the 20% that is often quoted is precisely because we argue that this is the kind of increase that one would have if one took into account-------

Q63 Mr Love: I apologise for interrupting you, but I had in mind specifically the criticism that Sir Partha Dasgupta has made in terms of the eta value of one that you place on it. He suggested that perhaps two might be more appropriate. How would a value of two change your review?

Sir Nicholas Stern: This is a very narrow question about one particular part, chapter 6, of the review. In making our case for strong action on climate change in chapters 3 to 5 we lean very heavily on the argument that it is the rich countries that have caused the problem, looking backwards anyway, but in particular it is the poor countries that will be hit hardest and earliest. Therefore, that part of the story in chapters 3 to 5 is absolutely dead centre. The discussion of eta in chapter 6 is a very technical one.

Q64 Mr Love: Can you explain it in a non-technical way for me and the public and how a different value would impact on your review?

Sir Nicholas Stern: I shall try. If we think about the distribution of value judgments they can be considered in many ways. One way to look at them - it is associated with the analogy of the leaky bucket, for reasons you will appreciate in a moment - is to ask the question: if as a hypothetical, ethical redistributor one takes 1 from person A who is five times richer than person B and give it to person B, under what circumstances can that be regarded as an improvement? If eta equals one then one says that one does not mind losing 80% of that 1 along the way; one will still think it is a good idea. If one lost only 79% one would definitely think it a good idea; if it was 80% it would just about be okay. That is the leaky bucket. The bucket has 1 in it and it does not matter if one is moving it from somebody who is five times richer than somebody else; it does not matter if up to 80% of the contents of the bucket leaks along the way; it is still worthwhile. That is the one-fifth rule. They are five times richer and each is equal to one. If each equals two one retells the story: the one fifth that one does not mind just being left and the 80% one does not mind leaking away becomes one fifth squared. That would be one twenty-fifth. One says that if one takes 1 from somebody who has five times the amount of somebody else one does not mind if 95% goes along the way; it is still a good idea. That is one way that economists and others think about these kinds of value judgments. There is a reason for considering higher values of eta. If one looks at the way in which redistribution schemes work within generations it is quite difficult in practice to pick up etas of that magnitude. I have no trouble with eta equalling two, but if you think through the example just given I suspect that some people would. If you raise eta in the model - there is a sensitivity analysis in the postscript on exactly this issue - you bring down certain of the distributions of probabilities associated with temperature outcomes in their relation to concentrations. You bring down the estimates of damage because you are putting more weight on the current generation relative to a richer generation. This is the key argument for discounting in the review on which we focused earlier. Some people argue that it should be weaker; some people say it should be stronger. Partha is one of those who argue that it should be stronger. But those are the kinds of ethical distributional discussions that we should have. I have had such discussions with Partha who is a graduate student friend. He and I would have very similar views on the delta which is the pure time discount rate. Partha is on record in that respect.

Q65 Mr Love: The criticism that is made is that you are being egalitarian between the past and future but not between the rich and poor?

Sir Nicholas Stern: Partha's comment was mostly in the context of now versus the future. I have already answered the question. If you read through the report I would be astonished if a balanced view was that it was not egalitarian. A lot of the comment I have received has been the other way.

Q66 Chairman: What emphasis should there be on adaptation and mitigation, and what is the relative importance of each?

Sir Nicholas Stern: I tried to deal with that question earlier. I think that both are very important. The story of mitigation should be one that tries to bring us below 550 ppm as the stabilisation goal because of the risks that that runs. That is a strong mitigation objective; it is a tough task. We have discussed the costs, but we believe it is possible. If that were achieved, which would require strong effort at mitigation, it would still leave a lot of adaptation to do. There would be a 50-50 chance eventually of being above or below 3C. Given that we are already seeing the effects of 0.7C, that means there is a lot of adaptation to do. I think that we have to move strongly on both fronts.

Q67 Chairman: You referred to the next 40 or 50 years. You said that what we do now will not affect the position in 40 or 50 years but in 100 years. Just to give a simple message to the public, how much time do we have in which to do something about climate change?

Sir Nicholas Stern: I should say that it will have some effect 40 or 50 years from now, but the much bigger effects will be after that. The effect is not zero at that time; it is much bigger later on. The notion of how much time we have comes from the idea of the stock and flow. We are at 430 ppm CO2 equivalent and adding 2.5 ppm a year, and the latter figure is rising. If we did not do very much we would probably average an extra 3 ppm a year over the next 30 years or so. That would take us close to 530 ppm - fairly close to the 550 ppm which many people regard as quite risky. That gives you a feel for how much time we have. To do nothing for 30 years will make it very difficult to achieve stabilisation of 550 ppm. If we are to get there it means that total emissions must peak 20 to 25 years from now and decisions and action must be taken in the next few years.

Q68 Chairman: Your report is voluminous. If our staff require any extra information or elaboration as a result of this morning's evidence I should be happy if you could send it.

Sir Nicholas Stern: We will try to be as helpful as we can. Bear in mind that the team will unwind six weeks from now. We have already unwound to about four or five people and spend a fair amount of time in public discussion and so on, but we shall do our best.

Chairman: We have finished bang on time. Thank you for your time, in particular for coming here early for us. This has been a fascinating evidence session. We wish you well in your discussions with many governments and organisations worldwide.


Witness: Rt Hon Lord Lawson of Blaby, a Member of the House of Lords, former Chancellor of the Exchequer, gave evidence.

Q69 Chairman: Lord Lawson, welcome to the Committee. We are delighted that you have taken the time to come here to speak to us on this issue. We are here this morning to talk about the economics of climate change, but in light of your CPS lecture it is only right to give you an opportunity to talk about the science briefly. Given the IPCC report which is unequivocal that climate change is due to humans, can I ask what your red lines are? Do you accept that not only is climate change happening but that its consequences will be disastrous?

Lord Lawson of Blaby: Thank you very much for your welcome, Chairman. Perhaps I may make a general response and then reply to your questions. There is more than one question wrapped in that. If I forget something I am sure you will remind me and I shall be very happy to answer it. I am delighted to have this opportunity. I was a member of one of the predecessor committees a little over 30 years ago, so it is good to be before you for that reason. This issue has such an important economic dimension that it is absolutely right that you should be inquiring into it; it is every bit as important as the scientific one. I hope that Members of the Committee have had time to read the piece to which I drew the clerk's attention in the current issue of World Economics entitled "The Stern Review and Critique". There is one other matter to which I should like to draw attention. I am in the midst of writing a more substantial piece than I have done so far and that will be published very shortly. If it is published before you conclude your hearings I hope that it can be circulated to the Committee. It is a pamphlet for the Centre for Policy Studies. On the science, perhaps I may very gently correct you on one matter. You said that the recent IPCC report had established that the science was unequivocal and that global warming was due to man.

Q70 Chairman: Those are not my words but the words of the vice-chairman.

Lord Lawson of Blaby: Perhaps I may spend a little time talking about the IPCC process. These are not views but facts. It is a very curious process. Dealing first with the scientific side - they have a different working group of economists but that comes later - it has a whole lot of scientists. To some extent it is a selected group because those who are very sceptical tend not to be invited to take part. But it is a broad measure of scientists, many highly reputable. They have produced a report. There is then produced by the bureaucrats, not by them, appointed by the various governments and the United Nations mainly from environment ministries and that sort of thing. None of them incidentally come from finance ministries. These bureaucrats then do what they call a summary for policymakers which they do in their own words and which differs from what the scientists have done. The scientists do not have the opportunity to make their own summary; it is done by the bureaucrats, and that hardens up. The chairman Dr Pachauri and his people then give a press conference which goes much further in hardening it than even the summary for policymakers. You can read that document yourselves. At the press conference they say that this is what the scientists are saying. It is two removes from what the scientists are saying. The next stage in the process is that they will now change the report made by the scientists. This is well known to those who follow the process; it is not a new allegation but a fact. That is why the full report has not yet been published. The full report will be published in two or three months after they have changed it to bring it in line with the summary for policymakers. The scientists can have no opportunity to review those changes at all. That is a curious procedure and I know of no other organisation that works in that way. It would be much better if they published the two things together but they do not because they are to make further changes. What is fairly clear, however, is that manmade emissions, largely carbon dioxide, have almost certainly played a considerable part in the 0.7C warming over the 20th century as a whole. There has been no further warming over the 21st century, but that may be just a temporary pause or blip; we do not know. There was, however, during the 20th century a 0.7C increase. It is highly likely that carbon dioxide emissions played a significant part in that. How large a part is very uncertain. If one reads the science it is extremely uncertain how large a part it played. But it is highly likely that it played a significant part in it. As to how much temperatures will rise in future because of it requires a lot of assumptions based on, to begin with, how much of the warming is due to emissions. Almost certainly some of it was, but one can never be certain in this field, but we do not know how much economic growth there will be; what the population increase will be; how energy-intensive the growth over the next 100 to 200 years will be. Different assumptions produce totally different results. One then asks: what are the likely consequences of that? It is difficult to say. For example, the Stern review, which I suppose is a call for action, focuses very heavily on what it sees as the disadvantages and ramps them up to an extraordinary degree. This is all in the World Economics. It says nothing about the beneficial consequences. It is partly for that reason, but also for a number of others, that I believe what we need to do apart from monitoring what is happening all the time is focus more on the consequences of warming, mitigate those consequences where they are harmful - where they are beneficial, pocket the benefits - rather than attempt at huge cost to cut back drastically as the Stern report recommends on carbon dioxide emissions.

Q71 Chairman: I think that what you are saying about the UN is that it is spinning par excellence and professionals in the UK could learn a lot from them?

Lord Lawson of Blaby: Some of the professionals in the UK are not bad at that, but certainly UN organisations like IPCC are pretty good at it.

Q72 Mr Gauke: You just referred to the huge cost required to mitigate the effects of climate change caused by humans. The Stern review refers to the cost of stabilising greenhouse gas as being 1% of GDP. How do you explain the difference between 1% and "huge cost" as you put it?

Lord Lawson of Blaby: One per cent is quite a big cost, but nobody else, apart from Stern, believes that it is as little as 1%. It is terribly difficult to know. The only way one could try to find out the cost would be to introduce - I know that this is one of the matters at which the Committee is looking - a carbon tax and see what the consequences would be. How high a carbon tax would be needed in order to cut back the amount that it is said should be cut back? I suspect that you would need a very high carbon tax, and people would put a stop and say it had gone too far long before that happened. The cost of 1% of GDP is highly implausible. There is another aspect to it which we have to bear in mind all the time. Sir Nicholas Stern referred to it during the latter part of his evidence, which was the only bit I heard. That is the curious thing that the sacrifices that you would be asking people of this generation to make in cutting back emissions are quite considerable. The emissions scenarios are based on the Stern projections; they are based on projections of steady growth over the next 100 to 200 years. Let us confine ourselves to 100 years. One of the oddities of the whole field is that one applies weather forecasting to economic forecasting to demographic forecasting. One piles uncertainty on uncertainty and apparently come to a certain conclusion of what should be done. I think that is highly implausible if anybody stops to think about it. In any event, the growth which generates the emissions means that, based on Stern's figures, people in 100 years' time will in terms of GDP be a little over seven times as well off as they are today. If one takes his worst case for the damage done by business as usual one finds that they are a little under six times as well off as they are today. That should cheer up people who are gloomy about the future of the planet. They are, poor things, just under six times as well off as they are today. The proposition is that we should ask the people of this generation all round the world - this is meant to be a global thing with international agreements and so on, which is most unlikely to be productive - to make considerable sacrifices now in order that their great-grandchildren or great-great-grandchildren, or whatever, who will be seven times as well off as they are today rather than six times as well off. It is as if at the time of the industrial revolution just under 200 hundreds years ago people were told that they should not embark on that process and burn coal but use wind and water, which were well known technologies at that time, so that we in this generation would not be as well off as we are today. I do not think they would support that.

Q73 Mr Gauke: I stray slightly from what I intended to cover, but Sir Nicholas told us a little earlier that he had taken into account the fact that people would be richer, and that had been included in his calculations. I know there is a lot of talk about the discount rate of 0.1%, but he said that the point you make about people in the future being richer had been taken into account in his assessment. Do you disagree?

Lord Lawson of Blaby: He made an hypothesis. Welfare economics is, as you all know, not only one of the most arcane but a totally subjective form of economics and different people come to different conclusions. He put in an eta of one. Because all of this is about ethical preferences and so on - anybody can have his own preferences and put in his own figure - this is not a form of economics where there is any objectivity at all; it is totally subjective. They use all these mathematics and Greek symbols in order to pretend that it is objective; it is not. That part of Stern is not only highly contestable but highly contested. Professor Dasgupta says it is ridiculous and he has pointed out that if you accept Stern's eta it means that the people of this generation should be saving 75% of their income for future generations. As he says, that is absurd. That part of Stern is, I believe, widely believed to be absurd. There is also an inconsistency because he is extremely concerned about less fortunate people in poorer countries at a particular point of time. Therefore, he thinks there must be equity between those, whereas in the case of equity as between a much richer and a relatively speaking much poorer generation he feels that they should be treated equally and there should be virtually no concern about that.

Q74 Mr Fallon: That is exactly the inconsistency, is it not? He is egalitarian on the one hand but not on the other. Presumably, you would advocate some form of discount rate for the intergenerational transfer. What would you have selected?

Lord Lawson of Blaby: I do not know what I would have selected. It would certainly have been a higher discount rate. I think that the overall discount rate that he chooses, using both eta and delta, is 2.1. That is far lower than is ever taken in any other context. Certainly, I would regard it as being much higher. But for practical reasons I think we would do better to devote our energies to trying to establish the specific adverse consequences of warming and take measures, only a few of which some governments would need to take, to mitigate them. For example, when one looks at the effects on agriculture and food production it is quite clear that the agro-chemical industry will invest quite a lot in developing strains which will thrive in slightly warmer climates where there is less water, although overall there will be more water. The curious thing is that Stern says having more water flowing down rivers, which in effect would happen, will not help because there are not the storage facilities. Obviously, the storage facilities would be built. They say that a lot of the problems will be solved by the markets and by industry seeing this as an opportunity, the development of different strains and so on. But there are other things where for the public good governments have to intervene, such as sea defences. If it should be the case that the sea level rises then obviously we should build the sea defences. Incidentally, the latest studies show that the rise in sea level over the second half of the 20th century was slightly less than in the first half, so the position is extremely uncertain, but we should watch it. A lot of the problems exist at the present time; there are problems of flooding in low-lying areas at the present time. One will be dealing with that problem, even if there is no warming or the warming is not as much due to manmade influences as was thought. Still, whatever its cause one gets the benefits. One also does not need the extremely ambitious and implausible international agreement before you can do anything worthwhile, because you can go ahead and deal with the consequences piecemeal as and where they arise, and you can help the poorer countries by giving them financial assistance to build sea defences if they cannot build them themselves. I think that it is a far more practical approach as well as being far more cost-effective.

Q75 Mr Fallon: I should like to press you slightly on the second transfer from rich to poor. Do you think that the entire methodology of the eta is bogus or do you believe that Stern has simply attributed the wrong value to it?

Lord Lawson of Blaby: I think that used in that way it produces absurd and counter-intuitive and mistaken results, but welfare economics are like that. Different people make different assumptions and reach totally different conclusions.

Q76 Mr Love: To try to sum up what has been said so far, is it wrong to say that you believe the science is imprecise and the economics too subjective?

Lord Lawson of Blaby: That would be part of it.

Q77 Mr Love: In relation to the economics - that was primarily what Stern looked at - are there other criticisms that you would make of what is in the review?

Lord Lawson of Blaby: The Stern review has turned out to be basically a work of advocacy. There is nothing wrong with advocacy; we all engage in it at various times, but I believe that a more objective, analytical approach would have been helpful. It is very clear - again, I refer you to the World Economics analysis that is already published - that he ramps up the alleged costs of warming to an inordinate degree and the benefits of warming are scarcely mentioned. The costs of mitigation are grossly understated in my view and the whole thing is very biased. One way in which the bias comes out very clearly is the treatment of technological advance. One of the reasons he comes to his relatively low cost of 1% of GDP is that he assumes there will be a huge technological advance in renewable and non-carbon-based energy and also things like carbon capture and storage. None of these things is remotely economic at the present time but he believes that there will be a huge technological advance. He assumes it and allows for it. When one comes to the mitigation of consequences - adaptation - he assumes that there is virtually no technological advance at all. Technology advances where he wants it to but not where he does not want it to. I think that is implausible.

Q78 Mr Love: I think you would accept that some assumptions have to be made and there are questions on the basis of those assumptions and the justification for them. In your article The Economics and Politics of Climate Change you say in relation to Stern: "If scaremongering seems a trifle harsh, I should point out that as a good civil servant he was simply doing his master's bidding." Do you suggest that the Chancellor was dictating his assumptions in the review?

Lord Lawson of Blaby: I think that the Government had taken a policy stance on this issue. As a highly intelligent man, he knew Mr Blair had said that this was the greatest danger facing the planet and all that. Obviously, he knew he had to come up with something which conformed to the position that ministers had already taken. He did not need to have a diktat to know that.

Q79 Mr Love: When Sir Nicholas had quoted to him some of the comments in your article he said that it was name-calling without substance. How do you respond to that?

Lord Lawson of Blaby: That seems to me to be name-calling without substance.

Q80 Kerry McCarthy: I want to pursue the question of adaptation, in particular the impact on developing countries. Have you carried out any calculation of the monetary value of any international assistance that rich countries would have to give to developing countries to enable them to adapt?

Lord Lawson of Blaby: No, I have not, but it is quite clear that it would be substantially less than the cost of going down the route of cutting back drastically. Drastic measures are called for on carbon dioxide emissions. As to developing countries, I make three points which are very important. First, although we should help these countries it must be remembered that on the growth assumptions on which the Stern projections of warming are based the living standards of the developing world as a whole - obviously, it will not apply to every country because some do better than others - will be higher in 100 years' time than they are today, which is great news if those predictions can be believed. Most of the countries will be able to afford most things themselves, but things will need to be done. Second, for a lot of these things they need help now when they are not so well off. If you take the problem of malaria it is extremely doubtful whether warming makes it any worse. Malaria was a serious problem in Europe in the past even during the little ice age in the 17th century. There is no great correlation between malaria and temperature. Nevertheless, some people believe that the increase in temperature may make it a little worse, but we need to stamp out malaria now. There should be aid projects now. Third, the developing countries that are developing fast - China, India and so on - are doing it on the basis of cheap carbon-based energy, and they will not stop doing that. They say that we did that and that was how the people of the west were taken out of poverty. They are now getting their people out of poverty and they are going to do that. They say that we caused all the emissions in the atmosphere and it is our job to deal with it. Of course, if you pay the Chinese to do it - in other words, if you say you will equip at your cost all their vast number of coal-fired power stations with carbon capture and storage - no doubt they will say "Thank you very much", but that will not happen. One has a real problem. One will not have the common price of carbon in the world which Stern wants to see. What happens if you do not have a common price for carbon? It means that the energy-intensive industries will gradually close down, if one is to make carbon energy much more expensive, in Europe and the west generally and they will grow in China, India and so on. Perhaps that does not matter; we are rich enough to be able to afford that, but it makes a nonsense of cutting back on emissions because global emissions will not be greatly affected; they will just be somewhere else. There are so many practical difficulties with this approach, which is why we want to monitor what is happening. If we are not certain we should watch it very carefully and take action to mitigate the adverse consequences. There will be some very beneficial consequences for northern Europe. This country will benefit over the next 100 years, even on Stern's projections. Nevertheless, there are disadvantages. There is another problem which I believe as an economic committee you should seriously think about, if I may say so. It is quite clear that the Chinese, maybe the United States too, will not cut back on their carbon emissions. There is already a move to introduce protection and trade sanctions against those countries that are not prepared to cut back their carbon emissions. M de Ville pin, the French Prime Minister, has come out in favour of that. Mr van Huygens, the European Union's Industry Commissioner, has said that this is what we must do. A number of lesser people have said the same. If one looks at the Stern review, it says that many people have said this should be done; there should be trade sanctions against countries that do not cut back their carbon emissions. He says that there is a clear logic in that. He goes on to say that maybe it would not be such a good idea, but we must be aware that industry will be increasingly pressing us. The implication is that at some time we will not be able to withstand the pressure from industry. I think that is enormously dangerous. One of the most important benefits that the whole world, particularly the developing countries, has enjoyed over the past 20 years is globalisation. Free trade and capital movements have allowed enormous economic growth and enormous numbers of people are relieved of poverty. Countries like India and China are powering ahead. To go down the protectionist route, or to give houseroom to protectionism, is extremely dangerous and is one of the biggest dangers that I see in the route which Stern charts.

Q81 Kerry McCarthy: To be fair to Sir Nicholas, in his evidence to us he very much advocated the carrot rather than the stick and said that sanctions should perhaps be considered as a last resort.

Lord Lawson of Blaby: I do not think they should be considered at all. . . .

Q82 Kerry McCarthy: But you say that the carrot approach to countries like the US, China and India in order for them to take action is futile?

Lord Lawson of Blaby: I think that in the real world where we all live it is hard enough to persuade government or public opinion to give free entry to Chinese competition as it is. I do not believe it is realistic politics to pay the Chinese large sums of money as a carrot to get them to cut back on their carbon dioxide emissions.

Q83 Kerry McCarthy: You focus on India and China where growth is predicted to occur.

Lord Lawson of Blaby: They are the fastest growing.

Q84 Kerry McCarthy: But the countries that are likely to be left behind are more susceptible to climate change, particularly those in sub-Saharan Africa. In your speech to the Centre for Policy Studies you said that the market would mean that farmers would simply adapt; they would grow new crops better suited to warmer climates. Is that at all realistic in some countries that are already struggling with infertile conditions and extreme weather?

Lord Lawson of Blaby: It is certainly realistic. If one looks at the statistics and reports of the Food and Agricultural Organisation one finds an enormous improvement in agricultural productivity worldwide. For example, if one looks at India which is a big and important country located in a tropical zone that is thought to be the most vulnerable, despite the warming that has occurred agricultural productivity in that country has improved considerably. There are problems in Africa, as we all know; which stem largely from poor governance, which is why it is so difficult to deal with them. That is why in those countries there is obviously a humanitarian and moral case for aid and assistance, which we give. Maybe it should be more specifically directed to deal with any problems that might arise from warming. I do not believe that the present way where do-gooders try to persuade Africans that they should not use carbon energy but solar power or wind power is the best way to help them.

Q85 Angela Eagle: Therefore, do you believe there is no point in trying to control CO2 emissions, even though just looking at the size of the new economies coming into more modern production and using carbon-based energy implies a huge increase? Do you believe there is no point whatever in trying to stop that happening and we just have to accept as a kind of externality to economic growth that CO2 emissions will soar with all the consequences that may flow from that?

Lord Lawson of Blaby: The rate of growth of carbon dioxide emissions is likely to decline as people become more energy efficient, and they become more energy efficient because they want to be more labour efficient and reduce costs

Q86 Angela Eagle: But in China there are two power stations burning heavy sulphurous coal coming on stream every month?

Lord Lawson of Blaby: Yes - and you will persuade them that they should stop that? Of course not.

Q87 Angela Eagle: They are quite interested in clean coal technology and having cleaner ways to produce energy.

Lord Lawson of Blaby: There is often a misunderstanding about that, if I may say so. What the Chinese are very concerned about is the pollution coming from their power stations. That is nothing to do with carbon dioxide which is not a pollutant. Carbon dioxide is a life force. Plants grow better with it and it has a fertilising effect. But they are concerned about sulphur dioxide and other pollutants; indeed, there is great pressure from the Chinese people about all the nasty things in the atmosphere. They are certainly concerned about that and will do something, but in my judgment they will not cut back on their carbon dioxide emissions unless somebody else pays for carbon capture and storage. Nobody has indicated that they are prepared to do that. It is very interesting that at the press conference in Paris held at the launch of the summary for policymakers one of the UN people - I cannot remember which one - complained that the Chinese delegation had been extremely obstructive. That is an indication that the Chinese view is a different one, and I understand where they are coming from. I do not think we will change it.

Q88 Angela Eagle: Therefore, do you accept as some kind of given that it cannot be mitigated at all and CO2 levels will rise. You suggest in your lecture that what you call geo‑engineering, which is the idea of blasting aerosols into the stratosphere, is a more acceptable way of proceeding?

Lord Lawson of Blaby: I think that a lot of things can be done on that front. The main point is to address the adverse consequences of any warming that may occur, whatever the reason, and mitigate them. I think that that is a rational way to address the problem. Whenever there is a problem one must decide the most rational way to address it. Geo-engineering is interesting, and research is already going on.

Q89 Angela Eagle: Mirrors in space and little silver balloons in the atmosphere?

Lord Lawson of Blaby: The people who have been proposing this are those who have been concerned about global warming. They are scientists, not economists, and believe that cutting back on carbon emissions is the most sensible thing to do. They think it likely that the world will not do that and, therefore, research ought to be conducted into alternatives.

Q90 Angela Eagle: I understand the plan B line.

Lord Lawson of Blaby: There is also nuclear power. I remember looking at this closely when I was Secretary of State for Energy. I set up the Sizewell B inquiry, which holds the record - it is not a particularly good one - as the longest planning inquiry that this country has ever had. I have some familiarity with all the issues involved.

Q91 Angela Eagle: It is true that even James Lovelock who developed the Gya theory is now in favour of nuclear power. But at the end of your lecture you come to the nub of it. You say that eco-fundamentalism is a new religion and it has formed a kind of global salvationist, almost an end-of-the-world millenarian movement, and this is profoundly hostile to capitalism. Your problem is that it is profoundly hostile to capitalism?

Lord Lawson of Blaby: My main problem is that it is profoundly hostile to reason.

Q92 Angela Eagle: You also mention that too. But what if there are aspects of capitalism when it has gone global with huge industrialising societies that are so hostile that the planet cannot sustain it?

Lord Lawson of Blaby: There is no sign of that whatever. If by "the planet" you mean the people they have benefited enormously from the capitalist market economy, and that is accepted even by the Labour Party.

Q93 Angela Eagle: But do you also accept that climate change is the greatest market failure?

Lord Lawson of Blaby: I do not know how you compare market failures.

Q94 Angela Eagle: Externalities, pollution and all the things that economics does not always price?

Lord Lawson of Blaby: If one goes down the Stern route one will find government failure in economic terms which is far more costly than what you refer to as market failure. Nevertheless, it is well known that there are externalities and public goods which governments must supply. I gave one example of that: sea defences.

Q95 Peter Viggers: There is not very much confluence of view this morning. How would you wish to see the argument develop so that greater objectivity is brought to bear on it?

Lord Lawson of Blaby: I think that the economic approach in which this Committee is engaged is a great help. Too often this is spoken about, as Ms Eagle has reminded us, in eco‑fundamentalist terms. I do not think that that helps the discussion. An economic analysis is very important, but my criticism is that it is an extremely biased and selective economic analysis, not an objective one. The idea of an economic analysis of the issue with no preconceptions on either side is the best way to get sensible policy decisions.

Q96 Peter Viggers: Under what auspices would this be created?

Lord Lawson of Blaby: I proposed some time ago that perhaps it should be taken over by the Bretton Woods Institutions. Perhaps a joint body of the World Bank and International Monetary Fund could deal with this. These are recognised international economic bodies with considerable economic expertise, and they can call upon more. I believe that that would be much better than the IPCC approach, for the very reason that their very existence does not depend on magnifying the importance of this issue. The IPCC does nothing else, and therefore the more important the issue the more important the IPCC is and the more important the people on it are. Naturally, there is what the French call a dformation professionnelle. If one gave it to the Bretton Woods Institutions, which have much less to do in the world of globalisation than before - if you like, they are looking for a new role to some extent - it would be a much better approach, because I accept that there needs to be an international analysis of this.

Q97 Peter Viggers: If you accept the premise that we have a problem - you may not accept it - both you and I will instinctively oppose regulation and tax for their own sake. But does a carbon emissions trading scheme which has an element of market force about it attract you?

Lord Lawson of Blaby: Not particularly. It is better than regulation and direction, but it is not as economically as efficient a route as taxation. There are many problems with emissions trading. The biggest one is how much you will permit it and which industries you will allow to do it. Will this system apply to the personal sector as well as the power sector and one or two others? Unless you do it across the board the more economic distortions there will be, whereas taxation would apply all over the place. How will one allocate the permits to the various countries and, within the countries, to the various emitters? It is highly arbitrary. A tremendous amount of horse trading and corruption go on. It is a very poor attempt at a market solution, whereas taxation just rides on the energy market that is already there. I give a good analogy though not a precise parallel. When I think back to my time as Chancellor, people were concerned about the health risks of smoking. These were used to justify high taxation on tobacco. If anybody had suggested that a much better way would be to give tobacco rations and allow people to trade them and it would be a much better market solution it would have been absurd, but that is the relative merits of taxation and rationing and then trading the rations, which is what the emissions permit system is.

Q98 Peter Viggers: The Treasury hope to move eventually to a global emissions trading scheme bringing in India, the United States and China. Have you any further comment on the likelihood of that being successful?

Lord Lawson of Blaby: It will be successful only if they think they can get something out of it. At the moment the Chinese are doing very well from the Kyoto's clean development mechanism, and that is an object lesson as to how these things work in practice. What has happened is that the market has grown up. Incidentally, another problem with emissions trading compared with taxation is that the administrative infrastructure which has to be put in place, whether by the public or private sector, is hugely more expensive than that required for tax-gathering. There is a huge deadweight cost. Under the clean development mechanism what happens is that the Chinese are allegedly cutting back on their production of chlorofluorocarbons (CFCs). There is some evidence that they are slowing down on the cut back in order to qualify for these credits. When they cut back the credits are then sold to western countries that are not meeting their Kyoto targets and are worried about it. Many western countries are not worried at all; clearly, they do not bother at all because they are way above their Kyoto targets. But there are some countries like The Netherlands that worry about this. Therefore, they buy credits from the Chinese under the clean development mechanism. Companies in China are making so much money that the Chinese Government is taxing that at about 65% which enables it to finance its coal-fired power station programme. Under the Montreal protocol these chlorofluorocarbon-emitting plants in China should have been wound down anyway with nothing in return. Everybody in the west has done it but the Chinese hung on and they are doing a good business out of the clean development mechanism of Kyoto. That is an example of what happens. As to the EU emissions trading scheme, you will know that the UK is about the only country that gave such a niggardly ration that the system has actually bitten. The cost of energy here is greater than it is in continental countries where they gave out the permits so lavishly that there is no cut-back required at all. It is likely to happen in the real world. If one is seriously concerned to cut back on carbon dioxide emissions the tax route is the only rational one to pursue.

Q99 John Thurso: Your central argument, if I have understood it correctly, is that the scientific data if regarded impartially is highly inconclusive and the conclusion you draw is that global warming may not be in man's ability to deal with. Therefore, the cost of action outweighs the perceived benefits. On the other hand, by that analysis it is also true that the opposite could be possible, that the consequences could be very extreme. Is there not a greater risk of doing nothing?

Lord Lawson of Blaby: One must bear in mind that of the total carbon dioxide emissions only about 5% are manmade; the other 95% are natural. Nevertheless, the great growth in carbon dioxide emissions is highly likely to be due to man and industrialisation and this has played a part in the modest amount of warming that has occurred through the greenhouse effect which is well known. There is no doubt about it. The question is: how big a part has it played? This science is extremely tricky. The interaction between carbon dioxide emissions and clouds is critical. Clouds and other forms of water vapour are much more important than carbon dioxide. There is a dispute among climate scientists about how they interact, so it is very uncertain. It has played a part and we do not know how big it is. Suppose that in the worst case scenario everything goes really badly and the planet warms up at the upper end of the Stern range and the adverse consequences are at the upper end. Under some kind of precautionary principle let us assume that will happen and take action now. If one does that one gets oneself into a very difficult position. There are all sorts of other things that are possible. Over the next 100 years the world may enter a new ice age. A lot of climate scientists expect that to happen. Is one to guard against that as well? How does one do both at the same time? There are also much more urgent problems to be faced such as terrorism and nuclear proliferation, leaving aside the natural disasters that may occur. Nobody can say that an asteroid will not hit the planet. One cannot do everything. If one tried to do so one would impoverish the present generation by taking out all of these insurance policies against every possible future development. One must decide rationally what is the most likely danger to be faced. I would say that over the next 50 years, let alone further, the dangers arise from nuclear proliferation, international terrorism and the fact that sophisticated weapons are now in relative terms much cheaper than they used to be. That gives terrorists greater capacity to do harm. I believe that those are the things on which we should be focusing far more. We should be careful not to spend money foolishly. We should be careful about future threats and be careful not to spend resources unnecessarily.

Q100 John Thurso: You feel that the worst case risk is one that we should not be too bothered about?

Lord Lawson of Blaby: No. We should monitor what is happening. There has been no further perceived warming in the 21st century and that is why the formulation has changed. We hear from the IPCC now that 10 of the past 12 years have been the warmest on record. That is a sign that the trend has stopped going up. If a country's population was rising and it stopped people would say, "Well, in 10 out of the past 12 years have produced the highest population we have had." But we should monitor what is happening very seriously. After all, this is happening very gradually; it is not a sudden event like a tsunami. Stern looks at the next 200 to 300 years. Indeed, at one point he looks at it over the next 1,000 years. We have time to monitor it and decide what to do.

Q101 John Thurso: Is there a role for environmental taxation in that scenario?

Lord Lawson of Blaby: I suppose that we have environmental taxation already. I have no objection to governments introducing green taxes as long as they use the money to reduce other taxes, if people are willing to pay it. After all, my paper to which you referred I said that that centuries ago Colbert said the art of taxation was the pluck the maximum of feathers with the minimum of hissing. If there is an acceptance of green taxes up to a point - there is a limit to what the public is prepared to accept - fine; let us have these taxes, provided it is not an overall increase in taxation and the money is used to reduce other forms of taxation.

Q102 John Thurso: How can an environmental tax be designed so that it reflects the damage done rather than it being simply a revenue-raising mechanism, or do you argue that it is acceptable and it should just be used to raise revenue?

Lord Lawson of Blaby: If it is a tax it is always rough and ready. For example, if factories are polluting rivers I suppose you can measure that and calibrate a charge for each one, but to some extent taxation is necessarily a rougher and readier form of tackling it. But one can certainly distinguish very clearly the sort of things that you want to put taxes on and the sort of things you do not. That is not difficult.

Q103 Mr Mudie: As I understand it, you are against doing much because there are so many other problems that may emerge: another ice age, nuclear proliferation and terrorism. But in none in those three cases do we have the depth of scientific opinion saying there is a great problem. Is that the reason you attack the scientists and the IPCC? Why do you want to abolish it?

Lord Lawson of Blaby: I do not attack the scientists at all.

Q104 Mr Mudie: Their voice is heard through the IPCC, and you want to abolish the IPCC. Why do you want to abolish the IPCC? Is it saying inconvenient things to you?

Lord Lawson of Blaby: No.

Q105 Mr Mudie: Why do you want to abolish it?

Lord Lawson of Blaby: I did not say that I wanted to abolish it just for the sake of abolishing it.

Q106 Mr Mudie: You did initially; now you say that you want to move it to the World Bank, but it is not global? It is under the United Nations, so why is it not global?

Lord Lawson of Blaby: I believe in looking at things as they are. The IPCC process has proved to be a very flawed one, for reasons set out partly in the report of the Economic Affairs Committee of the House of Lords.

Q107 Mr Mudie: You called it "political". Is it not just a smear against it? Why is it political?

Lord Lawson of Blaby: It is.

Q108 Mr Mudie: Tell us why it is political. Is it a socialist plot?

Lord Lawson of Blaby: If you read the report of the House of Lords Economic Affairs Committee you will see that what is wrong with the IPCC process is carefully documented. Other people have done that, too. I indicated that one of the problems was the curious nature of the IPCC process. I just said in answer to a question that I thought you would get a better economic analysis - the economic dimension as the Committee knows is very important - if it was given to the World Bank and the IMF.

Q109 Mr Mudie: I am happy to give some consideration to your views on the economic side where you have a distinguished history, but you are attacking the scientists. You admitted in your evidence to the American Environment Committee that you were not a scientists and that the world was warming. What is so political about the scientists that you want to abolish them?

Lord Lawson of Blaby: The scientists are not political, and I do not want to abolish them.

Q110 Mr Mudie: I will tell you what you did say. The politics was that they were giving all this information to scare the world so they could continue to get research funds. Do you not think that is appalling? That was what you said to the American Environment Committee.

Lord Lawson of Blaby: I do not call that politics, but it is very clear that in a world in which governments are largely responsible for allocating research funds where they think there is a practical result, and therefore one has to establish that there is a problem that needs to be solved, that is how one gets one's research funds. I am not saying that scientists are any worse than anybody else; I am just saying that they are human. We all respond to the incentives in the world around us.

Q111 Mr Mudie: These scientists at the weekend indicated that 40 million people in one country, Bangladesh, would be finished; their land would go.

Lord Lawson of Blaby: No, they did not; they said nothing of the sort.

Q112 Mr Mudie: They said that the delta would be flooded.

Lord Lawson of Blaby: They said nothing of the sort.

Q113 Mr Mudie: But that is the scale of it. You attack these scientists and say that we should not be taking action on it because we have terrorism and nuclear proliferation. We see the evidence with our own eyes with the Arctic ice cap, but this is imagination. You do not see this as serious enough and so you slander them and want to close them down.

Lord Lawson of Blaby: Mr Mudie, you are perfectly entitled to express your own views. You should not attribute to me views that I have never expressed.

Q114 Mr Mudie: Which one is that, Lord Lawson?

Lord Lawson of Blaby: That I have attacked the scientists for saying that 40 million people will die in Bangladesh.

Q115 Mr Mudie: I did not say that. I said that you attacked the scientists by saying they were exaggerating the threat to get research funds, which you did. You said it to the American Environment Committee, and I can give you the date of that.

Lord Lawson of Blaby: I never accused them of exaggerating. It is very hard for scientists who take a different view to get research funds. There is a range of views.

Q116 Mr Mudie: There may be, but you suggested that the IPCC did that, which is appalling.

Lord Lawson of Blaby: The IPCC is not the scientists; it is a bureaucracy which produced the summary for policymakers. There is no doubt that the scientists do a lot of very good work.

Q117 Mr Mudie: That is a bit patronising.

Lord Lawson of Blaby: But it is then changed when the summary for policymakers is written and it is changed again when the chairman of the IPCC and his head honchos give their press conference. You can read the different documents and see that that is nothing less than a statement of the fact.

Q118 Chairman: Lord Lawson, what would it take for you to accept that climate change cannot be adapted for? What if we do not have time to act? Surely, prevention is better than cure.

Lord Lawson of Blaby: Acting on the consequences of any warming that occurs is much quicker and easier, in the sense of being quicker and not as expensive as cutting back on carbon dioxide emissions. What I am suggesting is something that we can do in much shorter order.

Q119 Chairman: That conflicts with Stern's evidence this morning. If you were sitting round the cabinet table with the Prime Minister and giving advice - I am mindful that he was at the Liaison Committee this morning and said that Britain had done quite well but more needed to be done regarding carbon emissions - in a few words what would you say to him?

Lord Lawson of Blaby: I will tell you what I would say to you. If you look around objectively you will see that there is an enormous amount of posturing on this issue in this country, in Europe and many others elsewhere. Everybody says that this is the most terrible thing and we have to do this and that and have international agreements. It is said that this country will lead the world. What is actually happening? Very little is happening, for the very good reason that words are cheap. What I suggest is a practical route where things will be done. A lot of them will be done through the market adapting to whatever the conditions are and meeting the demands, for example in food and agricultural production. But there are ways in which governments can help. There is a clear case for particular kinds of international assistance.

Q120 Chairman: Your advice to the Prime Minister would be to sit back and see what happens and not become engaged?

Lord Lawson of Blaby: I think that the Government should look very seriously at what needs to be done to mitigate any adverse consequences of global warming that might manifest themselves. I believe that that is a real and genuine issue. But there is a great deal of posturing. If you think about all the people who say how marvellous Kyoto is, how many countries will hit their targets? There is a huge mismatch between what governments say and do. It sounds good and responsible, and that is why they say it. They are saving the planet and all that, but actions are not taken. Purely as an aesthetic judgment, all this empty posturing is not my style of politics.

Q121 Chairman: But if we get rid of the posturing there is still the real issue of climate change?

Lord Lawson of Blaby: It is a real issue. The climate has become warmer by 0.7C over the past 100 years. It is likely that manmade emissions of carbon dioxide have played a significant part in it, but we do not know how much. This is likely to continue to some extent, but we do not know by how much, and therefore we address what the consequences are likely to be. This is how man throughout his long history has dealt with climatic changes. There have been climatic changes and man has always adapted. The world has many and varied climates and different people in different parts of the world have adapted to the climates in which they have found themselves. That is the way history tells us that we should approach these things. The idea that somehow the best way to help the poorer countries of the world is to make it a colder place is bizarre.

Chairman: On that frozen note we shall cease. Thank you very much for your evidence, Lord Lawson.