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

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

 

 

CLIMATE CHANGE AND THE STERN REVIEW:

IMPLICATIONS FOR HM TREASURY POLICY

 

 

Wednesday 7 February 2007

JOHN HEALEY MP, MS BETH RUSSELL and MS REBECCA LAWRENCE

Evidence heard in Public Questions 250 - 330

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Treasury Committee

on Wednesday 7 February 2007

Members present

John McFall, in the Chair

Mr Colin Breed

Mr Michael Fallon

Mr David Gauke

Ms Sally Keeble

Mr Andrew Love

Kerry McCarthy

Mr George Mudie

Mr Brooks Newmark

John Thurso

Mr Mark Todd

Peter Viggers

________________

Witnesses: John Healey, a Member of the House, Financial Secretary to the Treasury, Ms Beth Russell, Head of Environment and Transport Tax team, Ms Rebecca Lawrence, Head of Environment, Food and Rural Affairs team, gave evidence.

Q250 Chairman: Minister, welcome to the public inquiry on climate change and the Stern review. Can you introduce your colleagues for the shorthand writer, please.

John Healey: Mr McFall, I am delighted to do that and delighted that the Committee has taken such an interest in this area which is of increasing importance to us all. I do not think the Committee will have come across either of my colleagues here: Beth Russell heads our environmental and transport tax policy team in the Treasury and Rebecca Lawrence heads the team in the Treasury that looks after the spending side, particularly of the Defra department and policy areas.

Q251 Chairman: Minister, we are hoping to finish this session at four o'clock because there is a vote. My colleagues will be sharp and precise in their questions and I am sure you will be the same with your answers. Yesterday when I asked Sir Nicholas Stern how long we had to take decisive action on climate change, he indicated that we have 30 years in which to stabilise emissions. But the IPCC report suggests we have only ten years. What is the Government's view on how long we have to act?

John Healey: I think the important message out of both Stern and the IPCC on that is twofold: one, that urgent policy action and particularly on international agreements and action is necessary to put in place now, not in ten years' time or in 30 years' time. What Stern did was to try to assess the scientific evidence of the likely impacts on the global climate from that and make suggestions over a period about different rates of stabilising emissions from that. The second important message, in particular, from Stern that is consistent with the IPCC studies and report is that, in a sense, the argument now has moved on. It has moved from questions about how strong is the scientific basis for the imperative to take action on climate change and on to the economic arguments about the need to take, first of all, early action because it is significant in its potential costs and implications but manageable and not to take that action would lead to much more severe consequences and severe costs. Both I think are consistent about the nature of the serious threat; the conclusiveness now of the science (which even the most reluctant governments, I think, are accepting); and, thirdly, the economics point, so the importance of action taken on an international level and agreements as the basis for that to be put in place as early as possible.

Q252 Chairman: You are of the view that the Treasury fully accepts the science unequivocally.

John Healey: We accept the analysis. We accept the thrust of the conclusions and the policy direction that the Stern report gives us. Not just in government and in the UK but increasingly, we can see that its impact and the debate that it has sparked will help some of the discussions that must lead to the international agreements that we have to secure as well.

Q253 Chairman: What steps are the Treasury taking to demonstrate effective leadership across government on climate change?

John Healey: You can see that in two ways if you want to look at the particular role of the Treasury. The first is that we have been very clear, right from 1997 when we first came into government, with our statement of intent on environmental taxation, that we would look to tax specifically, as well as other economic instruments, to play a part in dealing with some of the environmental policy challenges we face. That is the first thing - and you could look at the long list of environmental taxes we have introduced since 1997, many of which have been opposed inside and outside Parliament. Secondly, I think you could look to some of the arguments which the Treasury, particularly consistent with Stern - and the Chancellor in particular - has been leading internationally to argue that the environment is a mainstream economic and finance minister's concern. Alongside the Prime Minister, the priority we gave it during our UK Presidency of the European Union and of the G8, and, latterly, the pressure that the Chancellor has been exerting, both through the ECOFIN European ministers and in wider discussions, to try to put in place something of the vision for the future of the European trading scheme that we published alongside the Stern report when he reported in October. There are a number of specific areas which are clearly for the Treasury but we have been playing our part both in the UK and internationally in trying to lead the debate and the development of more effective policies.

Q254 Chairman: Lord Lawson gave us evidence yesterday. His views on the Stern report are that Nicholas Stern was just doing his master's bidding, which implies that the report was less than independent. How did the Government ensure that that review was independent?

John Healey: I think that diminishes the academic international independent status that Sir Nicholas Stern has had throughout his working career. You would need to have put that to Sir Nicholas Stern.

Q255 Chairman: He came first yesterday.

John Healey: Quite clearly this was a serious piece of work, carried out independently, with all the resources that he needed from inside the Treasury and from outside as well in order for him to do that. Frankly, the authority, the credibility and the integrity of the report depends on the fact that he conducted that report and I do not see any serious evidence or argument other than what you heard yesterday from Lord Lawson that somehow this was a compromised exercise that was not academically robust and not independently carried out.

Q256 Chairman: On the UN report which came out on Friday, Lord Lawson told us that that was characterised by starting with the scientific advice which was hardened by the bureaucrats into a summary for policy makers. They hardened it again at the press conference and, in Lord Lawson's view, that led to a biased public perception of the scientific findings. What are your views on that?

John Healey: I would profoundly disagree with Lord Lawson. I think it is inconsistent with the increasing weight and range of independent academic and other opinion. I think it was a blast from the past you heard yesterday. I think it was very broad-brush. The Committee will make up its own mind ----

Q257 Mr Love: We will.

John Healey: -- on the nature of the evidence and how well supported it was. The challenge for us all here, particularly for leaders and for parties, is that to look to tackle climate change you cannot claim to be environmentalist if you are Euro-sceptic, because clearly the solution and our ability to try to prevent further climate change depends on being able to get international action and agreements in place.

Chairman: Okay. It was quite a convivial occasion yesterday, so do not worry about that.

Q258 Peter Viggers: Your own Treasury Public Service Agreement, objective VIII, says that the Treasury has an objective to "Protect and improve the environment by using instruments that will deliver efficient and sustainable outcomes through evidence-based policies." How do you measure success in this field?

John Healey: If we look at the narrow policy area of tax, although the range of economic and other instruments in which the Treasury and the rest of government has an interest are not confined obviously to the political, the ultimate test of effectiveness of tax in the green territory is not the overall tax revenue take from what are classified as green taxes but surely it is the behaviour changes and the environmental gains that come as a result of the tax policies that are introduced for those ends. For instance, surely the test of the climate change levy is less the 760 million a year that it raises and more the 28 million tons of carbon it has saved since it has been introduced, which is more than a quarter of our Kyoto effort. Surely the test of the aggregates levy, another environmental tax that we introduced, is less the 300 million a year that it raises and more the fact that the volume of recycled aggregate stone now is 8 million tonnes a year higher and the amount that is being drawn out of the ground for the first time is 8% less despite the fact that construction during that period has been very buoyant. I would say the principal test of the effectiveness of environmental taxation, in particular, is the degree to which it has the environmental impact for which it was designed and, as part of that, often it encourages the sort of behaviour change that is necessary to underpin that.

Q259 Peter Viggers: Have you set targets in the field you have just mentioned: success in environmental improvement?

John Healey: We have targets in the climate change field as a government and the climate change levy was introduced to contribute towards trying to achieve those targets. We had a policy commitment in relation to the aggregates levy to try to reflect what were the external environmental and other costs involved in taking stone out of the ground and quarrying, and to capture those in this instance by the aggregates levy. They play a part in much broader policy goals and targets.

Q260 Peter Viggers: Have you set yourself specific targets in relation to the environmental improvements to which you have referred? If you have not set targets yet, would you plan to do so in the comprehensive spending review process?

John Healey: We do have targets. We have an internationally agreed Kyoto target to see the greenhouse gas emissions for which the UK is responsible cut by 2010 but over the 1990 levels by 12.5%. As things stand, we are on track nearly to double that.

Q261 Peter Viggers: Have the tax measures that you have taken themselves individual special targets?

John Healey: No, I do not think you could say they have specific targets but clearly part of our assessment of whether or not there is a strong case for introducing them involves a modelling of the likely impact they are going to have. For instance, the independent analysis that has been conducted and the climate change levy and its associated climate change agreements show that the climate change impact they are having is in excess of what we estimated before we introduced the climate change levy with the agreements they were likely to have.

Q262 Peter Viggers: Defra, the DTI and the Department of Transport hold a joint Public Service Agreement target to reduce greenhouse gas emissions. They are tasked to reduce greenhouse gas emissions. How much does that cost the Treasury in money?

John Healey: In a sense, they are identified as the lead department for what is a government aspiration to reduce climate change emissions in the UK and from the UK. The costs variously are carried, as with most environmental policies, in part by government, in part by consumers and in part by business. I think it is very difficult to distinguish precisely the sort of figures you are looking for.

Q263 Peter Viggers: In looking at the weapons available to you in reducing greenhouse gas emissions, what part does tax play and what part does regulation play?

John Healey: This may sound slightly unsatisfactory to start with, but perhaps you will bear with me. It depends on the particular problem or challenge you are trying to deal with. There is clearly a role for taxation in four identifiable areas. Where you have a carbon trading system already in place (as we have for 50% of our emissions in the UK through the European Union trading scheme, a system which sets prices and controls emissions) then clearly tax has a supportive role in helping deliver the aims for the trading system. For instance, we have the European Union emissions trading scheme in place but our climate change levy encourages energy efficiency in businesses to support that. In sectors of the economy which are not covered by a trading scheme (in this case the European scheme) then clearly tax can play a role in helping to price carbon, deal with the environmental and social costs and help to control emissions. Fuel duty plays, to some extent, a role like that. Thirdly, I think you can see a role for taxation alongside, in some cases, regulation. There is a role for taxation to provide a strong signal or in some cases support to other measures that are taken. For instance, with bio-fuels, the 20 pence per litre discount that we have on bio-diesel and bio-ethanol has played a part last year in doubling the level of bio-fuels' sales, the year before quadrupling that, but, in the end, it will be the new regulation and the obligation that we are introducing in 2008 that is going to deliver the real increase in the bio-fuels' market. The same could be said for the stamp duty exemption announced in the Pre-Budget Report on zero carbon homes - a useful signal, useful support, but actually zero carbon homes for new homes from 2016 will be delivered primarily by the planning and regulation system, so it has a supportive role as part of the package there. Fourthly, I think there is a role for taxation which I think is well established in that some taxes that are classified as environmental taxes also help raise resources for essential spending, including on environment and transport policies as well. That is the role of taxation specifically, a role it can play alongside regulation.

Q264 Mr Todd: Which government department leads on addressing the Government's response to climate change?

John Healey: I am going to ask Rebecca Lawrence to come in on this because clearly the policy lead in terms of departmental responsibility is rightly held by Defra but I need to be clear with the Committee that that does not mean that every other department, including the Treasury, does not have a very important and active role to play in helping to deal with our environmental policy challenges, in particular climate change.

Ms Lawrence: As the earlier question mentioned, the three departments have shared responsibility for the PSA on climate change. The resource accounts of those departments will set out the spend of those departments associated with achieving that PSA target.

Q265 Mr Todd: The lead minister in this is David Miliband. Is that a clear position that is understood and recognised in government?

John Healey: The clear policy responsibility for the environment rests with the Secretary of State and the Defra department but I do not think anybody could argue that the Prime Minister and other leading figures in the Government have not also played a very active part in ---

Q266 Mr Todd: But you understand the reason for asking the question, John, which is that government tends to operate in silos and therefore engaging the participation and support of other departments outside a minister's executive responsibility can often be quite difficult. Is that clear leadership one which has some degree of authority at a broader governmental level? Is there a clear cross-cutting budget, for example, which is agreed corporately?

John Healey: There can indeed be that problem but if you look at the last couple of years, at some of the major policy review and development work that has gone on, from the climate change programme review to the energy review to the work that is now going on in the preparation of the Energy White Paper, what you see, I would argue, is really an unprecedented cross-departmental, cross-government effort behind the climate change challenge. The approach that the Government is taking - which is really confirmed, I think, by Stern - that it is entirely inadequate simply to see the environment as a classified environmental problem and that without seeing the climate change challenges alongside some of the energy challenges that we face, without seeing the environment as an essential economic concern now in the way that we do and Stern confirmed, is really missing both the proper analysis and missing the potential ---

Q267 Mr Todd: I do not think you need to persuade me on that. I am looking for where the executive leadership lies. You are right in saying that it engages most departments of government in some way or another but obviously by dispersing leadership, both in policy terms and in financial accountability terms, you risk loss of focus and sometimes contradiction.

John Healey: The Prime Minister himself would argue that he has given a lead from the very top of government and I would entirely expect that to continue, and you can see - I think I would strongly argue that you have seen - other figures, not necessarily the Secretary of State for Defra, giving similar attention, whether that is in the DTI or the Treasury as well or, indeed, in the Department for Transport.

Q268 Mr Todd: How does one strike the balance in relationship to the European Union and their responsibilities? You will have noted the initiatives in the last few days on motor vehicle emissions, for example, which has been to use a regulatory framework rather than a fiscal framework to address the problem. How well coordinated do you think we are with what is happening within Europe? Is there a clear understanding of the division of responsibilities between regulation and fiscal initiatives?

John Healey: I think it is improving. Just as within a domestic government, you have within the Commission different directorates general looking at the role they need to play. That demonstrates, I think, that in the end we need to be looking to tackle climate change on a number of fronts. Within our own Government, almost every department has a role to play. Within Europe, to answer your question specifically, we have this month an Environmental Council of environmental ministers that will be looking at the whole question of climate change in the environment; we have an Energy Council of energy ministers that will consider some of the same questions; we have a Competitiveness Council that will consider some of the same questions, particularly in relation to internal market reform. But it has brought together, and will bring together on 8 and 9 March, the Heads of Government spring Council, which is obviously the proper place where we are working hard to see a European-Union-wide agreement to fresh targets and fresh priority given to this area. In the end, it has to be taken at that level.

Q269 Mr Todd: The EU initiative on car emissions highlights some of the policy difficulties in this because obviously that is a decision to establish, by regulation, limits on emissions which will have some effect on the competitiveness and cost base of the European car industry. Clearly there are some dilemmas there which have to be played out in policy terms at national level to feed into the EU process. How does that happen?

John Healey: Clearly any policy decision, particularly on the use of what might be termed economic instruments, whether those are fiscal or regulatory, has potential implications that just have to be considered in the round. Part of the work that will now follow the announcement today will look at, in order to achieve the 130 grams per kilometre target which the Commissioner wants to see by 2012: What are the potential costs and consequences? - and it is right that work goes on - What are the mechanisms by which this could most effectively be done? Those are, I think self-evidently, the sort of detailed questions that now need to follow what, in a sense, is a declaration of intent that we have had from the Commission announced this morning.

Q270 Mr Todd: You refer to Defra's lead in environmental policy. How comfortable are you with the fact that one of the key areas that Stern identified was that we would need to adapt to climate change as well as find measures to mitigate it. Defra has had a particularly tough year on its Environment Agency budget in dealing, for example, with flood defences. It has reduced in revenue terms its flood defence expenditure, which would appear to be directly counter to the kinds of things we are going to have to spend more money on according to Stern.

John Healey: Forgive me, I am not quite clear which question Mr Todd is asking. He will know the figures for the increase over the last five years in what Defra is spending.

Q271 Mr Todd: I am talking about this year's cut.

John Healey: Clearly, as we would expect and as I think Parliament would expect, Defra are managing within the department the financial pressures they have and that is their job to do that.

Q272 Mr Breed: Following on from that, the Committee is trying to ascertain how much the Treasury is now spending in terms of adaptation rather than mitigation. Mr Todd was talking about floods occurring on rivers, but in my part of the world floods regularly occur. In some fishing ports, fishing villages and such, that already happens now. With rising sea levels and unpredictable weather patterns, that is predicted to get worse. In terms of now and in a few decades' time, what is the spending proposal of the Government to try to undertake these adaptations rather than the mitigation?

John Healey: I will ask Rebecca Lawrence in a moment to talk about some work that has started in government now which is a policy framework across government on adaptation. Specifically on planning and coastal defences, in 2002 Defra was spending 394 million; in 2005 it was 564 million. Specifically, those are the figures, to answer your question. In future years, you will be aware, Mr Breed, we are examining decisions on that now across government as part of the comprehensive spending review and we will take those in due course.

Q273 Mr Todd: On the basis that Stern was saying in the review that some aspects of climate change are now unavoidable, clearly in order to meet some of those, if the Government accepts the review, that spending will have to rise significantly if it is going to mean anything in terms of the adaptation policy in terms of its effect on the ground.

John Healey: You may or may not have read the publication that we released in the autumn which was an analysis of what the Chancellor has called the five long-term challenges facing this country and facing the Government. One of those was clearly the challenge particularly of climate change. In our analysis we recognised, if you like, the cost of adaptation pressures that are there as a result of climate change and they will be recognised and taken into account as we consider the decisions we have to take as part of the comprehensive spending round.

Q274 Mr Breed: Do you think it would be a good idea to publish those and make much more of them, as a means of advising the public how important this work is and, in terms perhaps of their own activity, if they see the Government specifically publishing spending figures in respect of adaptation and such, so that they can see that the Government is taking this very seriously and that they themselves have a part to play?

John Healey: I think you are right about the importance of good information but what the Government decides it needs to spend is only a part of the picture. Part of what Defra does that is important is to support the UK Climate Impact Programme. This is an independent body which publishes analysis about the potential impact of climate change, the likely requirements for adaptation. It is there doing an important job in trying to help us understand the implications more clearly - and when I say us, not just government: it is there for the public and, importantly, it is there for business as well. If one considers the insurance industry then clearly the implications for the consequences of climate change and the requirements to adapt and to cover some of the costs there are profound for the insurance industry. So the better analysis, the better information and the quality of what we are able to assess for the future is an important part not just for government but more widely in helping us put in place the adaptation that we will obviously need.

Q275 Mr Breed: The Government recognises that some sort of social safety net might be necessary because there will be some people who just will not be able to obtain flooding insurance because it will have happened too often and, equally, they have no opportunity to move out of the way, as such. How is the Government going to deal with the inevitable social consequences of some people who are basically unable to get insurance any more for these very real problems of flooding that they are going to experience?

John Healey: In general terms, clearly the social consequence of any environmental impact or policies is part of what we need to weigh when making government policy decisions. On the specifics of the risks of flood management and insurance, I think you will be aware that that is one of the things Defra is looking at at the moment.

Q276 Mr Newmark: In answering the Chairman's questions you said we cannot have these policies in isolation, that it is a global problem. Therefore, how is the Government going to go about encouraging countries such as the USA, which is a 25% polluter in the word, or China, which is potentially an enormous polluter, given the amount of coal-fire plants and so on that are being built in China, as well as India? How can we influence change in those countries, rather than just focusing in on what is going on here? At the end of the day, we could completely reduce 100% but in a year's time it would make no difference to the global CO2 emissions.

John Healey: That is precisely right, Mr Newmark. UK emissions are only 2% of the UK total. That is not an argument for the UK not doing more, which we must, because in part our ability to exert the sort of influence that we need to exert internationally depends both on us demonstrating that we can have an economy which grows but that we can deal with the emissions challenge at the same time. We are playing a part in trying to encourage Europe to take a lead. Clearly, to the extent that we can get the European Union, as we are trying to do, to sign up to the target of a 30% reduction in greenhouse gases by 2020, we can get Europe to sign up to the sort of 60% reduction that we want to see as a minimum by 2050. That will help to create some momentum that I think is essential. Some of the international forums in which these other countries which you mention play a part, through the IMF, through the World Bank, have an important institutional role to play, just as they have played in the drive to improve debt development aid over the last ten years. In addition, we have to look specifically, as Stern encourages us to do, at arrangements that can allow proper carbon pricing and trading to be set - and here, again, this is the importance of the European Union because the European Union's emissions trading scheme ----

Q277 Mr Newmark: I am sorry to interrupt you there, but I am going to ask you a European Union question in a minute. I specifically asked about the US, China and India, which are the major polluters today. The largest economic power today, which is the US, how are you going to change their behaviour? They do not sign up to Kyoto. How are we going to change India and China? They are saying, "You have benefited from all this growth for the past 200 years and now you are telling us we have to slow down in what we are doing." How are you going to go about changing the behaviour of specifically those three countries? Because it is a problem.

John Healey: It is a huge challenge. Stern helps us. Here we have a body of evidence which is increasingly examined and recognised internationally. It also sets out a broad policy framework which, again, I think gives us the direction that we need to follow. Beyond that, we have to do what we can through the established bodies of the G8, the European Union, the other international forums to raise and press the arguments. Beyond that, we can do certain very practical things, as we are doing on carbon capture and storage, working with the Chinese on how we might develop and deploy technologies to try to deal with that.

Q278 Mr Newmark: Would we give them that technology or would we sell it to them? It is a great technology, by the way, but in order to put carbon sequestration into all these coal-fire plants in China is expensive. Would we, as a government, say we are going to pay for them to do that or not?

John Healey: Part of the consequence of the situation we are in is that we in the developed countries, who have seen our economies go from the pre-industrial through the industrial and essentially are largely responsible for the emissions that are currently creating the climate change problems, have to accept that we will have a greater responsibility and a greater share of the cost to bear if we are going to encourage the developing countries to move from what are rapidly developing and rapidly high carbon economies at the moment to nevertheless rapidly developing but increasingly low carbon economies. We have to accept that we have the responsibility and we will have to pick up a significant share of the costs of that. Now the question is: How best do we do that? Here our trading scheme - through the Clean Development Mechanism, some of the inevitable transfers of investment from the developed countries into the developing countries - is absolutely essential and needs to be developed further.

Q279 Mr Newmark: Our friends in France are opposing a European carbon tax on imports for those who do not join the international efforts to cut greenhouse gases. Do you think that is a sensible strategy?

John Healey: I think the most sensible strategy is that which we are trying to pursue, which is to say that the cornerstone for the future has to be in the trading scheme and that we should concentrate our efforts on strengthening the current phase two and getting in place a sensible set of agreements for how we develop that beyond 2012.

Q280 Mr Mudie: Just following on the question in terms of China and India, one of Lord Lawson's lines yesterday was that really we should not bother all that much because if China and India do not do it what is the point? One of the areas we have pushed is carbon emission trading schemes. This will only work if the major countries come on board. Bearing in mind that last week we were thinking we had 30 years and the IPCC changed it to ten years when they released their report, how realistic is it to envisage getting carbon trading emission agreements globally in that sort of time scale to make some difference to that time scale?

John Healey: I think it is realistic. I think it is achievable but it will be tough and it requires the European Union to give stronger backing to its own trading scheme. It provides us with the capacity to set emissions' limits; harden a carbon price; see the sort of transfers in investments and technologies that need to take place into countries like India and China. It also gives us the arrangement that allows other trading schemes which are beginning to be established in other countries in other parts of the world to link in with what we have, as I described earlier, which needs to be the cornerstone of international climate change architecture for the future.

Q281 Mr Mudie: You have said it is tough but it can be done. What are we doing to encourage the setting up of such a trading scheme? What are we doing now? In ten years, in terms of getting an agreement across major countries, takes some doing.

John Healey: We are doing what we have done from the outset. We, in the UK, were the first country to have an economy wide trading scheme ourselves. We were prepared in this current first phase of the European trading scheme to set the toughest cap. As we have seen in recent weeks, we again have been ready to set the toughest cap for the second phase. It is the only one that has essentially been agreed unchanged so far by the Commission. We have reasonable credentials to make our arguments for how we develop it further. An important document was the one the Chancellor released alongside the Stern report, which was to set out what is our vision for how we need to develop the European Union trading scheme further. It essentially has three elements. Basically, it requires us to see the trading scheme established on a much more stable basis, with clearer and tougher emissions limits, so that it creates a scarcity that will determine a stronger carbon price. Secondly, it means ----

Q282 Mr Mudie: If I could just cut in, I understand that - and I do not mean to be rude or anything. That is fine. That is within the European context. I think there can be a criticism of our role, how we start it, how we are pushing it. This is global. We are looking more at China, India, Mexico, Brazil. Globally, what are we doing, as a government, to bring them together, to get this body set up and this agreement?

John Healey: We are making precisely the arguments I am trying to outline for you now. I was going to say the second element is that we need to build the scheme as the centre of a global carbon market. In other words, it needs to cover more sectors; it needs to cover more gases; it needs to link those trading schemes that are already being established in Norway, Sweden and Japan and some of the states in the US; and, finally, it needs to be a scheme that can encourage the sort of investments in those countries which do not have the scheme but where, in terms of developing economies, the escalating trajectory of emissions causes the greatest concern over the next 10, 20, 30 years.

Ms Lawrence: Might I add to that. A lot of this has traditionally been the area of environment secretaries and heads of state, so we have the Gleneagles dialogue and the UNFCC processes, but the Stern review gives us a powerful new evidence base which allows economics and finance ministries to talk to each other. In the Treasury we have been quite actively engaged since then. For example, the Blair-Schwarzenegger initiative with California on exchanging best practice means that we in the Treasury have spoken to officials in California about our experience of working with emissions trading and how that could work with the Californian scheme. Similarly, Prime Minister Howard in Australia recently set up a taskforce on emissions trading. That taskforce is coming to visit different players within the UK, but including the Treasury, so, again, we can exchange our experiences about what we think of emissions trading as a tool for emissions reductions.

Q283 Mr Mudie: I am grateful for that because it enlarges on something my colleague Mark said in terms of leading by Defra on these issues. You are saying the Stern report allows the Treasury and Number 10 to make a more leading role and realise they have to take a more leading role - yes?

John Healey: No, I think it confirms, if I may say so, precisely what has been happening, perhaps in the UK ahead of some others. It confirms that it is right and necessary to happen.

Ms Lawrence: ECOFIN will be one example in Brussels which now regularly looks at climate change alongside energy issues. We have ensured that the Stern review has been discussed by the feeder committees; for example, the Economic Policy Committee, which then advises ECOFIN.

Q284 Mr Mudie: In the Pre-Budget Report we talked about bringing together "the leading market makers in the City with the key international institutions in countries" to discuss such a global scheme. When will this meeting take place?

John Healey: We are working on that at the moment. I would hope it takes place this year.

Q285 Mr Mudie: This year. We have only got ten years, John! Do you see a need to create an international body to implement and monitor such a scheme? Has any work been undertaken to set it up or is this too early in the stage? Are you going to do it through any existing international body?

Ms Lawrence: At the moment the verification and the monitoring for the UETS goes on through the European institutions and, then, for the Clean Development Mechanism through the Kyoto institutions. That is the framework within which we are operating at the moment.

John Healey: I think the short answer is that we have a number of bodies and institutions, none of which are currently as well suited or giving sufficient priority to these things as necessary. In some areas it requires us to do new things. The Chancellor has taken the lead in trying to set up an international partnership on dealing with bio-fuels, for instance, that draws on Mozambique, South Africa and Brazil, because there was not a way of being able to explore how we develop a much stronger but environmentally sustainable bio-fuels market.

Q286 Ms Keeble: I wanted to ask a bit about extending emissions trading schemes to households. Some of the evidence that we have had has suggested that, instead of using the EU's ETS model, there should be personal carbon trading schemes, which might be a more effective way of achieving the right level of emissions, and that this could either be by individuals selling their entitlements to businesses, or people drawing off an individual carbon account, as it were. Have you looked at that model? What did you think of it? Why perhaps did the Treasury decide not to go for it?

John Healey: It is an interesting idea. It is a relatively new idea. We are looking in government at the merits of it. I think there are some profound practical questions inherent in the approach but we are prepared to look at it and we are doing that.

Q287 Ms Keeble: One of the advantages it has, perhaps, is, by providing incentives for individuals, raising the awareness of people as well. Had you looked at that as an advantage? How else do you see that you engage with the public in a much more direct way about emissions?

John Healey: In a sense there is no single and simple solution to this. Much of the work that Defra is leading is beginning to do a good job in this field. Part of it is supporting organisations like the Energy Savings Trust; part of it is encouraging programmes that local authorities can sponsor (for instance, through energy efficiency measures or the promotion of micro-generation); and part of it sometimes is a supportive role, as I suggested earlier on, for taxation. In the Pre-Budget Report, for instance, we made clear that we will legislate in the Finance Bill to ensure that anybody who has surplus energy through their own domestic micro-generation will not pay income tax if they sell it back to the grid. That can all contribute to helping create the circumstances in which individual householders can do more and individual householders can consider more carefully what they can do.

Q288 Ms Keeble: I would like to ask a question about offsetting. What do you think are the prospects for people, if they are offsetting, to be able to have their local community derive some benefit rather than having that entirely benefiting developing countries? Had you looked at that or not?

John Healey: This is also a relatively new idea which we would certainly be prepared to look at, particularly if it is put to us either by this Committee or by other sources.

Q289 Ms Keeble: Some of the local environmental groups have put that forward as being, again, a way to incentivise behaviour and also to demonstrate more clearly the local benefits that can derive from offsetting. But that has not been put to you at all.

John Healey: I have not considered it in any detail. It has not been worked up in sufficient detail for us to do so but we are happy to do so if it comes to us in that way.

Q290 Mr Fallon: Minister, you told the Environmental Audit Committee last year that you define the Treasury environmental taxes as simply "the climate change levy, aggregates levy and landfill tax" whereas the ONS uses a much broader definition, including taxes on energy and road vehicles. Professor Ekins told this Committee two weeks ago that the "international consensus as expressed by bodies such as OECD ... is very much in line with the definition of the Office for National Statistics. That seems to me to be the definition that makes most sense." Why are you so out of step?

John Healey: We are not out of step at all, Mr Fallon, if I may say so. The definition of the Office of National Statistics is consistent. One of the features is that it is consistent with international definitions.

Q291 Mr Fallon: But yours is not.

John Healey: No, we accept, because clearly the Office of National Statistics categorises taxes which may have an environmental impact as environmental taxes. In the Treasury we have a much more focused definition, where we are devising taxes for specific environmental policy ends or gains, and, in terms of policy development, if we are concerned with environmental gain then clearly it makes sense to make your policy instrument (in this case, tax) as sharply focused as possible. That is why I would argue that the climate change levy or the aggregates levy are environmental taxes with specifically an environmental policy purpose in mind and not simply potential environmental impacts which may be associated with their operation - which would be true of fuel duty or air passenger duty.

Q292 Mr Fallon: It is policy purpose rather than impact. A year ago, you told the same Committee that "the air passenger duty is not an environmental tax; it is not related to a concern about emissions, it is not related to more efficient aircraft, it is not related at all to more efficient use of the aircraft which are flying." What is the policy purpose of air passenger duty?

John Healey: The policy purpose when it was first introduced in 1994 was clearly, in part, to raise revenue and that remains part of the case for the air passenger duty and its operation. It is a blunt instrument as far as the environment goes. It is not the best policy instrument to try to deal with the environmental impacts of aviation, which is why our priority is to get the aviation with the European Union trading scheme. It is not even the best tax instrument to deal with the effects of aviation. But you will know better than anyone, Mr Fallon, we are entirely boxed in by a complex set of legal constraints over an ability, for instance, to raise duty on aircraft fuel. The air passenger duty is available. It does have an environmental impact - although in narrow terms it is not specifically a tax that is designed for environmental ends - and clearly the decisions we take on levels of air passenger duty include a consideration about whether or not there is an environmental gain in altering the rate.

Q293 Mr Fallon: Sir Nicholas Stern was clear yesterday that if you keep increasing duty you would expect fewer people to fly. Is that right?

John Healey: You may have seen the explanation we gave around the Pre-Budget Report decision to double the rate of air passenger duty. The demand effect of that is that perhaps five million passengers out of 140 million may not be flying by 2010, therefore there is a demand impact. The environmental gain from that on our modelling is a range between 0.2 and 0.5 million tons of carbon. If you take a mid-point from that, 0.3 million tons of carbon is probably the environmental gain by that duty decision on air passenger duty.

Q294 Mr Fallon: If it is such a blunt instrument, as I think you have now acknowledged, what tax instrument would better tackle the environmental effects of aviation?

John Healey: Some would argue that -----

Q295 Mr Fallon: What would you argue?

John Healey: If you will forgive me: some would argue, and the Government has made clear, that the legal constraints on being able to consider duties of any type on the use of fuel in international aviation is an anomaly and a constraint on our ability to consider that as a tax policy instrument. But our principal policy aim - because we believe it is for both aviation and more generally likely to be the most effective - is to see aviation included in the European Union trading scheme and to do so as soon as possible. Once again, in the UK and from the UK, with support from the industry, we have led arguments for that move and have been encouraged by the work the Commission has been doing recently in their proposal in December.

Q296 Mr Fallon: Given they are not expected to join the trading scheme fully until 2011, are you reconsidering how to incentivise airlines in the interim period? It is four years until then.

John Healey: Clearly we are encouraging and working with the industry where they are able to reduce emissions, where they are able to put in place sensible and genuine carbon offsetting schemes. In the meantime, one of the justifications, I think, in environmental terms of the decision the Chancellor took on air passenger duty is that, as Stern makes out, and as we have consistently argued as the Government, it is right that every sector makes some contribution to dealing with climate change, and it is surely right that aviation at least covers the environmental cost that its activities impose.

Q297 Mr Fallon: But you have nothing before 2011 to further incentivise the aircraft industry, apart from increasing air passenger duty as you have, or perhaps again.

John Healey: We are prepared to look at other policy measures. We have said consistently that we believe the trading scheme is the best policy solution, but we said in the Air Transport White Paper in 2003, in the Budget in 2004, 2005 and 2006 and in the Energy Review last year as well that we will - and we do not rule out - be prepared to look at other policy instruments and the use of those if there is a case for that.

Q298 Chairman: When the airline representatives were here I was making that very point to them and challenged them that, given they have five years' free ride until 2011, what are they going to do in that interim period, given that they think air passenger duty is the wrong tax? I have challenged them on that, Minister, and I am looking for the airline industry to come back and not to slide out from that. I think there is an issue here that they should be doing something up to 2011. Would you agree with that?

John Healey: I would encourage the aviation industry to take the further steps that they have been doing to date. Where they are working with us on some of the policy areas I mentioned earlier on, we welcome that as well.

Q299 Chairman: What I am suggesting to them is along the right lines then.

John Healey: I think it is unarguable. Although some may argue it, I think it is unarguable that aviation should at least be contributing and covering the costs that it imposes through its environmental impact.

Chairman: You agree with me. That is the thing. We will move on.

Q300 Mr Gauke: The Chairman is always on the right lines, Minister. Could you clarify something: Is air passenger duty an environmental tax as you define it?

John Healey: It is an environmental tax as classified by the Office of National Statistics. It is an environmental tax in their terms, internationally comparable terms, because, although its principal policy purpose may not be environmental, clearly it has an environmental impact.

Q301 Mr Gauke: A year ago, as Mr Fallon has quoted, you said explicitly "the air passenger duty is not an environmental tax". What has changed in the last 12 months?

John Healey: I have described the air passenger duty as a blunt instrument and not principally an environmental tax for environmental purposes. I have just been pretty clear with the Committee: air passenger duty is not the most environmentally effective tax for aviation; it is not the most environmentally policy for aviation; but it is available. The decisions we took at the Pre-Budget Report will lead to environment gains, both direct emissions reductions and further emissions equivalent reductions because of the other greenhouse gases. We have consistently said that, although our first priority is to get it into the trading scheme, we will consider the case for other policy measures.

Q302 Mr Gauke: Does the Treasury have an estimate as to the level of emissions or the number of flights that will be reduced that would otherwise occur had it not been for the increase in air passenger duty?

John Healey: We do and it derives from the model that HM Revenue & Customs use for air passenger duty. I was able to set this out for the Environment Audit Committee last week. As I mentioned just a moment ago, the modelling that we have of air passenger duty suggests that the APD rise that we announced on 6 December will lead by 2010/11 to around five million fewer passengers flying out of a total of around 140 million and that gives you the impact on demand. It gives you from that an ability to calculate a likely emissions reduction.

Q303 Mr Gauke: About 3% or 4%, would that be right? On my maths that would be a reduction of 3% or 4% from what otherwise we would have had.

John Healey: It is a reduction of round about five million out of 140 million.

Q304 Mr Gauke: As you are the Treasury I am taking it that you would be better at sums than I am.

John Healey: Thank you.

Q305 Mr Gauke: You have said that principally it is not an environmental tax, if I recall what you said a moment or so ago, but would it be fair to say that the Chancellor, when he presented it in the Pre-Budget, Report did say very explicitly it was an environmental tax and principally an environmental tax?

John Healey: No, but he quite rightly said that the decision that he was announcing on the level of air passenger duty would lead to an environmental gain, that it would lead to emissions reductions, as I said, at mid point of around three million tonnes of carbon a year by 2010, but actually, when you take into account the impact of emissions at high level from aviation, that is a climate change equivalent effect of about a three-quarters of a million tonnes of carbon, so there is an environmental gain to be had from the air passenger duty and he made that clear when he made his announcement.

Q306 Mr Gauke: If I can turn briefly to something that came up yesterday, Sir Nicholas Stern told us that the first he knew that he was going to be working with Colin Challen was when the Chancellor told him. Did the Chancellor make Mr Challen an offer he could not refuse?

John Healey: No. There is clearly a misunderstanding here. The initiative that Mr Challen is involved in - he is Chairman of the All Party Parliamentary Group on climate change - is independent of government, it is through an all party group and is potentially an all party exercise. It seemed to the Chancellor and to me a very good idea for senior parliamentarians to get together with senior academics and others, including Cambridge University, and not just in the UK but across the Commonwealth, to discuss some of the challenges that we all face. That is something that we think is a good idea, that we want to support. The Chancellor passed on the proposal from Colin Challen to Sir Nicholas Stern and I am glad, as he confirmed to the Committee yesterday, that he is willing and looking forward to working with Mr Challen and others on this.

Q307 Mr Gauke: We know the Chancellor facilitated the arrangements with Mr Challen and Sir Nicholas Stern. We also know that Mr Challen will be working, as you say, with Cambridge University and specifically the Centre for Energy Policy Studies, which is run by a senior Labour activist, Mr Nick Butler. Was the Chancellor involved in any way in facilitating the arrangements between Mr Challen and Mr Butler and the Centre of Energy Policy Studies?

John Healey: No. The Chancellor's involvement was confined to receiving the proposal from Mr Challen and passing that to Sir Nicholas Stern. It is clearly a good idea, it is clearly something we want to support -----

Q308 Mr Gauke: Did the Chancellor have any contact with Mr Butler on this issue?

John Healey: No.

Q309 Mr Gauke: Unequivocally? I know they both spoke at the same Fabian Society conference on 13 January.

John Healey: No, the Chancellor has not discussed this with Mr Butler. To some extent, if I may say so, I am disappointed here, because clearly the idea of bringing your senior parliamentarians and your senior academics together, not just from the UK but within the Commonwealth and more widely, to discuss what policy implications and challenges we face on climate change really ought not to be a matter of party politics, particularly when you have it led from this House by Colin Challen, who is Chairman of the All Party Parliamentarian Group on climate change, a group that has as its treasurer, Mr Gauke, your party's treasurer who is your spokesman on the environment, and 23 of your colleagues; MPs who are members of the Conservative Party are members of this group. Clearly there is a basis here for a really important initiative.

Q310 Mr Gauke: Minister, I am not criticising that. I am simply trying to get to the point, and, if I may say, you appear uncharacteristically defensive on this point, as to precisely what the role was of the Chancellor in Mr Challen making a decision not to stand for Parliament at the next election in order to fight issues relating to climate change and to work with Sir Nicholas Stern. I was merely asking what the arrangements were. I am grateful for your answers.

John Healey: Good. I do not mean to be defensive; I do not think I am defensive. I hope I am clear: it is independent of government, it is a good idea, we fully support it and I hope that support for this initiative extends across party.

Chairman: Minister, your five million out of 140 million, given this is a Treasury Committee, is exactly 3.5%.

Q311 Kerry McCarthy: I know the Treasury has historically not been at all keen on the idea of hypothecation of taxes or ring-fencing them to meet particular spending objectives, but would it not be easier to sell the idea of environmental taxes to the general public if they thought the revenue raised was actually being used to mitigate environmental damage?

John Healey: Sometimes there is a good and clear case for using the proceeds of environmental taxes for environmental purposes. We have, for instance, recycled some of the revenues from the Climate Change Levy to support the Carbon Trust. We have recycled some of the proceeds of the Aggregates Levy to support the Aggregates Sustainability Fund. There is clearly a more general case for devoting revenues that may be raised from environmental taxes, if one likes, taxes generally on bads, on pollution and damaging activity, to offset some other revenue sources that may be goods, so, for instance, when the Climate Change Levy was introduced, rather than taking that entire revenue into the Consolidated Fund we cut the national insurance contributions for employers by 0.3%. We did cut it by 0.1% when we introduced the Aggregates Levy, but it is well established that some taxes that are clearly classed as environmental taxes also help to raise revenue for essential government spending and services, including on the environment and transport. That has been the case, for instance, with the fuel duty virtually since it was introduced in 1928.

Q312 Kerry McCarthy: In terms of using environmental taxes to raise revenue, surely with a successful environmental tax, if it is to work in changing behaviour as well, the actual revenue would dwindle as time went on as it would have the desired effect that companies would change their behaviour. Is there any mileage therefore in offsetting those with tax cuts elsewhere? I think the Liberal Democrats, for example, have suggested that they could raise 20 billion by environmental taxes and they would use that partly for public spending but they would offset that with taxes. Is it possible to operate on that sort of basis?

John Healey: No, I think it is important to consider the questions that need to be analysed and dealt with on raising revenue and to consider those separately from questions of how one might want to spend those revenues. As I say, there are established environmental taxes, such as fuel duty, which have historically and for decades played a part in raising general revenues that governments have been able to use flexibly and importantly for other essential spending, and that allows not just for greater flexibility; it also allows for greater stability in the tax revenue base.

Q313 Kerry McCarthy: But taxes such as the fuel duty are not primarily designed to change behaviour, are they? They are revenue raising mechanisms, which is why they do not fit the Treasury's definition of environmental tax, so presumably it is quite easy to predict the revenue streams from those sorts of taxes, but when it is ones that are more aimed at changing behaviour it is more difficult?

John Healey: It is certainly true that if you have a tax that is specifically aimed at environmental gain in changing behaviour, as it becomes successful (as with the Aggregates Levy) your relative tax take diminishes to the extent that the tax itself is effective. I mentioned earlier on that the quarrying of stone and other aggregate for the first time has gone down by 8% in recent years since we proposed and brought in the Aggregates Levy. Clearly that is having the policy impact that we want. In revenue terms it is also going to mean the revenues are reduced by that amount.

Q314 John Thurso: Minister, in the Pre-Budget Report the Government stated that a key aim of government intervention is to encourage behavioural change' I am interested in behavioural change. To achieve that objective at what level do environmental taxes need to bite?

John Healey: That is an impossible question at a general level and I think it is only possible to examine that when one looks at the design and operation of specific taxes or potential taxes. I mentioned to the Committee earlier on the Climate Change Levy. That has had an impact on investments in and activities that have led to more efficient use of energy amongst businesses. That has led to energy efficiency savings such that that by 2010 the Climate Change Levy itself will mean that perhaps three and a half million tonnes of carbon less are emitted by businesses covered by the Climate Change Levy. It is only when one gets into the design and operation of specific taxes that one can consider that sort of much more general question.

Q315 John Thurso: If you look, for example, at emissions, and I think it is our shared ambition to see them reduce, there is a problem to a certain extent in that revenue will reduce if the emissions also reduce. To what extent can the Treasury commit therefore to emissions reduction given that it has to have regard also to raising revenue?

John Healey: The Treasury quite clearly and very strongly has committed itself to tax playing a part in emissions reductions. For instance, let me take the Climate Change Levy. Part of the design of the Climate Change Levy package is 80% discounts for climate change agreements, so firms in the most energy intensive sectors that enter into these agreements pay the Climate Change Levy not at 100% but at 20%. We did that (a) because we thought that there was an important international competitiveness concern that we needed to build into the design of the Climate Change Levy package, and (b) because we believe that could also be effective, despite the fact that we took a revenue hit on that element of the design, as it has proved in helping to reduce emissions. The same could be said for the duty discount on biofuels, for instance. At 20p per litre, once we get to 2008 and we are looking at a 2.5% market in the UK, that will be a revenue foregone, in other words, a cost in revenue of around 300 million to the Treasury. We take that into account, but clearly it has not stopped us wanting to put that in place because we believe it is going to help drive and develop the market in biofuels in the UK and it is going to help, because of that, secure some of the emissions reductions from road transport in a sector that we need to do more in.

Q316 John Thurso: Clearly, a key element in seeking to change behaviour is the ability to measure the impact of any given measure. Are you satisfied that you have got the measures in place to be able to measure behavioural change?

Ms Russell: We do set out in the HPBR and Budget at the back of chapter 7 our latest evaluation and assessments of emissions saved or other environmental impacts of our taxes. On many of our taxes, company car tax recently, the Climate Change Levy, there have been significant evaluations undertaken of the taxes which have then subsequently been published.

Q317 John Thurso: What has been the most effective? Do you know?

Ms Russell: In terms of just the taxes themselves, the Climate Change Levy, as the Minister said, is probably the most effective.

Q318 John Thurso: Would you agree that the other side of that equation of behavioural change is the carrot, tax, regulation being the stick, and a stick and a carrot are both needed to get the best effect? On that point the question is what the Treasury can do to help here because this is about giving money away. There was an article in this morning's Guardian where the Renewable Energy Association were accusing the DTI of killing off the demand for solar panels and wind turbines on homes because the monthly budget for that programme had run out an hour and a quarter into the month. Is the Treasury looking and working with DTI to increase those programmes to fulfil the demand that there clearly is for people to put such devices into their own homes?

John Healey: The short answer is yes, both on the specific question of how we look to encourage the growth of the market and the incentives for taking up things like solar energy and microgeneration. That was part and parcel of the 50 million that the Chancellor announced at the last Budget to help try and support that. Clearly there has to be a role for both the stick and the carrot, as you quite rightly point out, Mr Thurso. That may be done through spending programmes. That may also be done, as we have done, through the tax system as well. Achieving through tax that universal switch to ultra low sulphur fuels was done essentially because we were able to put in place through the duty system an incentive that priced ultra low sulphur fuels slightly more cheaply at the pumps than what they replaced, so clearly a combination of stick and carrot, a combination of policy measures, whether those are information campaigns, sometimes government spending, sometimes regulation or sometimes tax, is often required to see the sorts of changes that we would both want to see in the future.

Q319 John Thurso: Could I ask you if you would look at the Low Carbon Buildings Programme to see if some more could be made available because it is clearly very successful and what we would all want to encourage?

John Healey: That will be one of the areas that we look carefully at in the context of the Spending Review this year.

Q320 John Thurso: One last question, if I may. The Irish introduced a plastic bag tax, the result of which is that the number of bags issued by shops is down by 90%. The Scottish Parliament chose for its own reasons not to proceed with such a measure, but what is your view on such a measure?

John Healey: We have also been following the Irish experiment quite closely. Our judgment at present, and we are ready to take fresh evidence and look at it again, is that when you consider that plastic bags are less than 1% of the waste stream in the UK and that it has had in Ireland some perverse consequences in terms of other things that may be used that they had not necessarily anticipated, it is not necessarily a good instrument in our view to deal with some of the problems that we have over volumes of waste. As I say, we are ready to look at fresh evidence and arguments for whether we could and should introduce it in the United Kingdom but we have not been convinced yet.

John Thurso: I have to say I have a major plastic manufacturer in my constituency who is not very keen on the idea either.

Q321 Mr Love: According to the definitions of the Office of National Statistics you mentioned earlier on, the total proportion of tax revenues made up by environmental taxes has been falling in every year since 1999. This Committee, when it reported on the Budget last year, commented on the use of environmental taxes and could not greater use be made of them. What is the current Treasury position on that and do you think there is more opportunity for environmental taxation to achieve the Government's objectives?

John Healey: I think in general there may well be scope and we are ready to look at the scope for using environmental taxes as part of what we need to put in place and do so more. If I may say so, though, I think the wrong way of assessing that is to look at the total revenue take from environmental taxes because if your yardstick for the commitment or success of environmental policies is simply the revenue that is drawn from green taxes I think you miss three important things. The first is that clearly high tax receipts in such a field can either be a result of high rates of tax or the activity that you want to discourage. The second thing is that simply looking at the level of revenue misses the essential point that we have discussed this afternoon, that you can use the tax, for instance, in the discounts for the Climate Change Levy through agreements, for instance through the duty discounts for biofuels, in a way to encourage the sort of behaviour you want to see but nevertheless has a hit on the revenue figures. Thirdly, the tests should better be that you get the behavioural change, you get the environmental gain as the measure of the policy's success rather than the revenue.

Q322 Mr Love: In these circumstances are you suggesting that their reduction is a sign of success, that behavioural is taking place? Is there evidence for that?

John Healey: No, I am not. What I am saying is that simply using the yardstick for total revenues derived from green taxes does not tell you about how effective they are or how successful government policy and clearly tax policy is as a whole, and so therefore it is a misleading and imperfect measure.

Q323 Mr Love: A number of the environmental groups have been saying to us, and indeed have been saying more generally, that the Government has steered away from this area because it feels that this may be bad for the economy. How would you respond to that so-called criticism, that environmental taxation is bad for the economy?

John Healey: That is too sweeping to be of any significance as an argument. Some environmental taxation, if it is well designed and deployed, can actually be beneficial to the economy, but I think we are right in government and in the Treasury to consider, as part of whether or not we introduce or change rates of environmental tax, what the economic consequences are going to be, both for households and for businesses. That is an important part of the balance of pressures and concerns that we would need to take into account in those decisions. On fuel duty, for instance, I am aware that some advocate the reintroduction of an automatic annual escalator. I am aware of some of the criticisms of the green groups that somehow we have not raised fuel duty in the way that we should for environmental purposes, but if you look over the last two years, up to last summer, for instance, at how the pump price of diesel rose by 16p per litre, in those circumstances I think it would have been a mistake to have an automatic escalator that jacked it up still further. It would have caused problems for the motorist and indeed economic consequences for British business. I use that simply as an illustration of how judgments on tax have to be able to weigh some of the environmental ambitions that are there with the economic consequences, and indeed the social consequences too, because in some cases some taxes will hit poorer people and poorer households harder.

Q324 Mr Love: The Stern Report dealt pretty robustly with the argument about the impact on the economy. However, he took a more nuanced view in relation to the possible impact on innovation and efficiency, competitiveness, if I can put it in those terms. What is your view about the impact that environmental taxation may have on competitiveness in some sectors of the economy?

John Healey: Clearly it depends on the particular environmental tax that one is looking at. To the extent that it may affect price and be designed to affect price, it would have that potential. That potential is clearly magnified if it is a move that has just taken place in the United Kingdom. It is one of the reasons why trading rather than tax is, in our view, a much better approach for dealing with some of these environmental concerns around climate change because essentially it helps you do two things. Firstly, it helps you overcome some of the concerns about competitiveness impacts in a particular country and, secondly, it helps you achieve the sort of reduction in emissions in the most cost-effective way that is possible.

Q325 Mr Love: The overall thrust of the Stern report was that the 1% cost that there would be to stabilise global greenhouse gases up to 2050 is much less than the possible 5-10% impact on GDP that would occur if we do nothing. To what extent has the Treasury been able to factor in those figures in any cost benefit analysis that it is doing about the likely impact of environmental taxation and other issues, or is it too early for that to have happened?

John Healey: You will appreciate that with 700 pages we are still examining some of the implications of ----

Q326 Mr Love: I see you all have copies with you today; we should have brought our copies as well!

John Healey: I will not encourage Rebecca Lawrence to quote from the Stern report, unless she really wants to. Clearly there are some areas where there are implications which we are considering. I think the importance of the Stern report overall is the analysis leads to the conclusive message that there are significant costs in dealing with the challenge of climate change but those costs will be far greater if we do not take the action that is necessary and those costs will be far greater if we do not take that action internationally rather than unilaterally within the UK or elsewhere.

Ms Lawrence: If I can add one thing, and I will not quote from the Stern report. We do accept the analysis and the conclusions that the report gives. That 1% is dependent on quite effective and careful policy design where you need sufficient flexibility in your policy and you need to be mindful of costs because if you design your policy badly you can push costs higher than that.

Q327 Mr Newmark: I have got more macro question. I am more interested in your particular view on this, Minister. On one of the analyses the assessment of the Stern report was that in order to do what we need to do it would cost something like 1% of the global GDP. Do you see that as achievable, realistic, and sensible? It is a pretty expensive cost given that historically the problems were not created by this generation and that future generations will benefit from that, so this generation is being asked - I am talking in a global sense - to pay 1% of global GDP.

John Healey: In a sense you are posing an ethical rather than an economic question.

Q328 Mr Newmark: Yes.

John Healey: Personally, I, and the Government, would go along with the judgments that Stern has taken that underpin his report. Clearly there is a significant cost.

Q329 Mr Newmark: So you think this generation should pay for future generations then, which is essentially what that is saying?

John Healey: I think this generation has a particular responsibility to take steps to allow us to start to deal with climate change and it is quite right that in attempting to see a stabilisation of emissions in the sort of territory that Stern indicates we accept and understand the consequences and the cost of those and in making those sorts of calculations we should not regard the value of the world, as it were, the importance that future generations might place on a healthy and sustainable climate and world, any less than we do at the moment. I think it is right and it is reasonable that this generation takes its responsibility for helping to safeguard the interests of future generations who will also have many of these challenges to face for themselves as well.

Q330 Chairman: Minister, we gave you the figure of 3.5%, which was to the first decimal place. One of my colleagues has been very inventive and he has said it is 3.571428 recurring!

John Healey: I hope that helps the Committee with its inquiry.

Chairman: Thank you very much for your attendance, Minister.