Memorandum submitted by Friends of the
Earth (England and Wales)
INTRODUCTION
We are deeply concerned that despite the Stern
Review's clear conclusion that action on climate change is the
"pro-growth strategy", and that "there
is still time to avoid the worst impacts of climate change if
we take strong action now", the Treasury is still taking
a remarkably complacent and piecemeal approach to tackling climate
change. In summary, there are five areas of concern to us.
First, the Comprehensive Spending Review was
particularly disappointing in that so few changes were made to
reflect the Stern Review's analysis. The Stern Review was very
clear that urgent action is needed on climate change, not least
to correct many market failures, particularly on energy and energy
efficiency policy. In this context it was very surprising to see
so little help given to individuals and so few strong signals
sent to business and industry wanting to go green, introduce energy
efficiency measures or use new technologies.
In a letter to The Chancellor in the run up
to the PBR, Friends of the Earth pointed out the importance of
such signals for the business community. We cited a recent report
by PricewaterhouseCoopers which concluded that just over half
of the companies surveyed (51%) are not confident in making long-term
investment decisions in the context of the current environmental
tax and regulatory framework, and that current environmental incentives
in the tax system are seen as unclear, too complex and fail to
motivate behavioural change.
Second, on taxation more generally there was
again very little progress, after the encouraging signs at Budget
2007. Friends of the Earth welcomed the decision at the Budget
to announce in advance three years of above inflation increases
in fuel duty. The Chancellor missed an opportunity to send a very
strong signal to households and industry by not stating that these
rises will continue after 2009.
There were in addition no tax breaks or spending
announcements for households wanting to invest in energy efficiency,
despite Stern's firm conclusion that major policies are needed
to overcome market failure in this sector. The latest official
figures on tax shifts show that the environmental tax take is
just 7.7% of total taxes (2005), down from 9.4% in 1997, despite
the Government's commitment to increase this percentage share.
Third, the "implementing the Stern Review"
document is largely a rehash of existing measures, with nothing
to suggest that the urgent message in the Stern Review is going
to translate into strong policies. It does not set out new policies
to address the concerns of Stern regarding market failure in the
energy sectors and energy efficiency. In addition the report presents
a purely one-sided view—it trumpets the good measures the
Government is doing, but fails to address the policies which negatively
affect the UK's carbon emissions.
This relates to our fourth major concern, which
is that climate change still appears to be seen within Government
as predominantly an environmental issue; which misses the strong
connections with other Departments' policies. This failure to
connect the environment with broader policy is a main reason for
the UK's failure to cut carbon emissions in the last 10 years.
Chapter 4 of the PBR, on future economic prosperity, makes only
cursory passing mentions to climate change—despite the Stern
Review making it absolutely clear that tackling climate change
is a central economic issue, and a critical determinant of the
UK's future growth (eg "tackling climate change is the pro-growth
strategy"). There is little to suggest that Govt is looking
to pick policies which integrate progress on multiple PSAs—instead
we are most likely to see the continuation of existing practice,
where failure on one PSA is treated as the price worth paying
for progress on another. This would be unacceptable policy-making
in normal circumstances, but even more so in the face of a threat
as urgent as climate change.
Finally, we are disappointed that the Government
still continues to hide behind its conjuring trick of not including
emissions from international aviation and shipping in its assessment
of progress. These are real emissions—their non-inclusion
gives an extremely misleading and rose-tinted picture of what
policies are required in future for the UK to do its part in preventing
dangerous climate change. Hiding behind the UNFCCC's failure to
come up with a methodology for assigning emissions to countries
is a simply unacceptable response for a Government wishing to
proclaim itself a world leader on tackling climate change.
AREAS IN
DETAIL
1. HM Treasury's report on implementing the
Stern Review
We are concerned that Treasury is misapplying
the Stern Review's conclusions on the use of price. Stern is quite
clear that the purpose of the price mechanism, and other policies,
is to deliver on an overall goal: "A long-term stabilisation
target should be used to establish a quantity ceiling to limit
the total stock of carbon over time. Short-term policies (based
on tax, trading or in some circumstances regulation) will then
need to be consistent with this long-term stabilisation goal"
(p315). In other words, the carbon cap determines the price and
other policies. However, the Treasury's October 2007 Implementing
Stern document says the opposite. It argues that the basis of
the carbon price is "to reflect the damage caused by emissions
and to require Governments businesses and individuals to meet
the costs they impose on the environment" (p10), in other
words, the price determines the cap. The implications of this
fundamental difference between Treasury and Stern are highly significant.
You only need to look at the surface transport
sector—where for example the effective price of carbon is
far higher than the stated damage costs, and where emissions continue
to rise—to see that such an approach does not in any way
guarantee that the Stern Review's "long-term stabilisation
target" will be met. One reason for this is that the economics
on which "damage costs" is based in highly flawed—the
Social Cost of Carbon (which is also at the heart of the Government's
proposed new "shadow" price of carbon) is based on monetising
climate impacts—a process which is inherently bankrupt.
It is not possible to monetise many of the impacts of climate
change. For example, many impacts are too uncertain (will the
Greenland ice shelf melt? How fast?), unmonetised (what are the
financial impacts of millions of environmental refugees?) or unmonetisable
(what is the value of a coral reef, or the Amazon rainforest?).
DEFRA's reviews on this subject are explicit that there are large
categories of impact which are simply not monetised—damage
cost figures are gross underestimates and an extremely poor guide
for effective policy making. One peer reviewer for DEFRA described
the social cost of carbon as having "neither a robust
central estimate or a plausible upper bound ... the policy usefulness
of such a concept with such characteristics is effectively zero".
It is time that Treasury stopped seeing "internalising the
externalities" as the policy goal for use of carbon price.
The policy goal for using carbon price should be instead "ensuring
the country's carbon budgets and long-term climate goals are met".
The failure of the internalising externality approach is most
blatantly apparent when looking at the DfT's recent emissions
costs assessment, where it is stated that the purpose of measuring
carbon emissions is simply to compare the monetised value of these
emissions with the tax take from aviation, not to deliver any
environmental objective.
In effect, carbon price is determined by the
cap for EUETS, but in other sectors it is crucial to ensure that
price is used to help deliver on an overall economy-wide cap,
not simply to internalise a poorly calculated externality.
We are also concerned that the paper does not
provide a coherent overall picture of action on climate change.
Section 4.66 for example mentions savings of "up to 1.1 MtCO2
per year" from APD measures. However, these are savings against
a baseline which assumes major increases in aviation emissions,
increases which are in large part due to Treasury taxation policy
which has meant that in the last ten years aviation has got cheaper
in real terms. In order to meet the targets in the proposed Climate
Bill, the Government needs a strategy which considers all of its
policies, not just the positive ones.
2. Comprehensive Spending Review
The November 2006 Treasury document Long term
opportunities and challenges for the UK set out that, for example,
the annual costs of flooding to UK homes and businesses and infrastructure
could increase ... "... a range of costs from 2 to 27
times current spending levels by the 2080s, depending on emissions
trajectories ... ". This report also outlined that impacts
would be worse in developing countries. The Stern Review also
advocated major policy measures to tackle market failures, including
global quintupling of spending support for deployment of new technologies,
and doubling of R&D spending, as well as setting out that
the costs of inaction would be around 5-20% of annual GDP, with
costs of action at 1% of GDP.
In this context it was deeply disappointing
that so little priority was given to climate change at the CSR.
The majority of DEFRA's extra spending is to flood defences (ie
dealing with the impacts of climate change, not preventing it).
The details of the Environmental Transformation Fund are still
very vague, but even if this is new money, or going to sustainable
technologies, it would be an order of magnitude too low. There
is also no sign, despite some extra money for greener transport
modes, that the DfT's overall spending will be any less carbon-intense
than it was before. Neither was there any spending help for householders
or business wanting to implement energy efficiency improvements
or install cleaner technologies.
We note that according to Treasury figures 2006-07
spending on "non-fossil fuels and sustainable energy"
was £73 million (compared with £517 million spent on
nuclear[1]),
and that DEFRA spending on fuel efficiency grants was just £332
million. Overall, annual Government spending is £587,000
million. The Prime Minister said this week: "The climate
change crisis is the product of many generations, but overcoming
it must be the great project of this generation". In
this context, Government spending on climate change is pitifully
low, given its acknowledgement of the scale of the problem. This
CSR was a massive opportunity missed.
On energy efficiency, the Government's failure
here is absolute—years and years of reviews and consultation,
and at this autumn's pre-budget and spending review almost no
incentives to help people and businesses be more energy efficient,
despite this being the most cost-effective strategy for the UK
to pursue. The Government is well aware of the massive market
failure in this area, frequently refuses to take action in other
areas using the excuse that it is not "cost-effective",
yet repeatedly fails to act in this the most cost-effective and
least politically controversial area of all. DEFRA has recently
announced the launch of a green homes service and one stop shop
for energy advice. On the face of it this seems a very positive
step and sits well with the need for it to be cheaper and easier
to cut carbon emissions for homes. The scheme outlined by DEFRA
in its press release looks ambitious but the funding to make it
happen is not. A figure of £100 million is mentioned but
it is unclear whether this is new money or over what period it
will apply.
It is one thing to have a service which directs
householders to grants and financial assistance but this assistance
needs to be available in more than token amounts. The farcical
state of the Low Carbon Buildings Programme is a case in point.
This sort of activity cannot be done on the cheap.
On renewable energy policy, we remain concerned
that the Government is not behind this major economic opportunity.
The Prime Minister may have recommitted the UK to meeting its
share of the EU renewables target, which we welcome, but we are
concerned that the UK will still be lobbying for this share to
be as low as possible. We feel the leaked BERR memo on renewables
over the summer is indicative of an old-fashioned anti-renewables
mind-set—the document asserts high costs of renewables,
ignoring the economic and job benefits of a rapidly expanding
new sector of the economy, the economic benefits of reduced climate
impacts, and the potential for stronger policies on energy efficiency
to massively reduce those costs (the targets is for a % of demand;
energy efficiency policies reduce demand and therefore the amount
of renewables needed). They also neglect to mention that the reasons
costs for renewable energy technology can appear to be higher
than more established technologies is because of existing market
failures, which the Stern Review devotes whole chapters to outlining.
If BERR think there are high costs, it should amend its policies
to correct the market failures that cause these high costs, not
use them as an excuse to water down its commitments. This is the
amend-policies approach favoured in the Treasury's Implementing
Stern report, which argued "One of the important roles
for complementary policies on technology and behavioural change
is to make it less expensive to reduce emissions overall, although
such policies can also have other important co-benefits. Where
caps are not yet at the optimal level for the desired environmental
outcome, such cost reductions can help to set them at a more ambitious
level in future".
The leaked memo also states that meeting a 20%
renewables target would be bad because it would mean the EU would
be delivering more than its total 20% carbon reduction target.
This view is indicative of the can't-do attitude apparently rife
within BERR on climate change—the possibility of over-achieving
a target is an argument for not implementing a policy, but the
converse—under achieving a target - is an argument for dropping
the target.
The recent speech by Gordon Brown seemed to
draw a line under the leaks. This was welcome but the extent to
which it follows through into policy changes has yet to be seen.
The forth-coming Energy Bill and the Budget will be key indicators.
Willingness by the Government to look seriously at a feed-in tariff
would also indicate that the rhetoric is translating into action.
3. Public Service Agreements (PSAs)
We are extremely concerned that the new PSAs
will not help ensure all sectors play their part in tackling climate
change. In particular we do not see how the delivery strategies
for the PSAs are compatible with the targets to be set in the
Climate Change Bill. For example, PSA 27 on Climate change states
that the DfT's role is to ensure only that "transport
policies balance the increasing demand for travel against
protecting the environment" (our underlining). Yet we
have seen from experience that "balancing" these demands
in, for example, the Aviation White Paper sees a strategy which
allows for a greater than doubling increase in carbon emissions.
PSA 5 on delivering reliable and efficient transport networks
has a tiny section on climate impacts, which merely restates the
need to "balance" these objectives. Given that the key
indicator of success of PSA 5 is benefit-cost ratios which have
an inherent bias against environmental concerns, it is in our
view extremely unlikely that climate change concerns will be given
adequate weight in transport policy making and in PSA 5.
It is a continuing major omission that the Government's
strategy on productivity, set out in PSA 1, focuses so narrowly
on labour productivity. There are other aspects of productivity
which can help the UK's competitiveness, and also environmental
goals—resource and energy productivity. While it may have
been the case in decades past that resource inputs were a minor
element of productivity, this situation has now changed. It is
becoming increasingly important for all economies to make rapid
improvements in the efficiency with which they use resources and
energy. This point was acknowledged by the then DTI in its old
sustainable development strategy ("improving resource
productivity is an overriding priority", DTI SD Strategy;
"Resource Productivity is the key priority in the DTI
Sustainable Development Strategy, and will be an increasingly
significant area of opportunity for business for the future".
Patricia Hewitt, DTI, 2001), however the current productivity
strategy focuses entirely on labour productivity. This is a major
opportunity missed, for UK businesses and the environment.
We are also concerned about the use of the "shadow
price of carbon" in PSA 27 on climate change as a measure
of whether a policy is effective or not. The shadow price of carbon
is based on the social cost of carbon, the flaws of which are
highlighted earlier in this evidence. It is right to look at cost-effectiveness,
and Government should pick the most cost-effective measures unless
other core Government targets are compromised. But the "cut-off"
point must not be defined by the shadow price of carbon, because
of its inherent flaws, but instead by being the point at which
the UK's overall carbon budget is delivered. We agree that cost-effectiveness
should be monitored—however there are many measures which
have a very low or even negative cost, and yet these are not implemented.
A policy focus should be to overcome the barriers to implementing
these very cost effective measures, again, as identified by Stern.
We are also concerned about the impact of the
new rules on Impact Assessment set out by Cabinet Office (and
now implemented by BERR). The new guidance does state that climate
change impacts must be included in policy appraisal, but insists
on monetising these impacts in a way which ensures they can always
be traded-off. Treasury and DfT's recent reviews of the Social
Cost of Carbon and of transport appraisal also do not appear so
far to have taken into account the need for emissions not to be
exceeded. This is a fundamental clash of an old-fashioned approach
that different objectives can be traded-off, and a post-Stern
approach where objectives have to be integrated. We see policy
structures which lead to continued trade-off of objectives rather
than integration as being one of the major problems of delivery
of the new set of PSAs.
4. Budget measures—General
Budget 2007 included increases in all the main
environmental taxes, and it was hoped that this signalled a post-Stern
realisation of the need to strengthen environmental tax policy.
However this PBR was a major set-back. This was especially disappointing
given positive speeches at Labour Party Conference by the Prime
Minister, Chancellor and Secretary of State for Business, Enterprise
and Regulatory reform (see appendix).
In addition to the failure to send strong signals
to the business community about the future direction of policy
the Government's continuing refusal to use environmental taxation
to make it is easier for people to go green in their homes is
disappointing—for example measures such as Stamp Duty Rebates.
Lack of basic insulation measures affects over 8 million households.
There were no financial incentives for people wanting to install
green energy or electricity in their homes—such as announcements
on feed-in-tariffs, or increases to the grants available to people.
There was almost nothing to help people go green.
Overall, although the Government has some good
environmental tax initiatives, they are more than balanced by
tax policies acting in the opposite direction—such as aviation
taxation. There is not a coherent strategy here to use taxation
in conjunction with other policies to deliver on a carbon budget.
We feel that such a strategy will be an essential and urgent requirement
for delivering the Climate Bill's targets.
We also feel that the Government continues to
miss the opportunity to sell green taxes better. Environmental
taxes are repeatedly portrayed as being stealth taxes, which makes
it harder to justify them politically. We advocate that the Government
recommits itself to its 1997 statement of intent on environmental
taxation, and sets out a strategy for increasing taxes on pollution,
explicitly linked to cuts in other taxes—the Environmental
Tax Reform agenda. Polls repeatedly show that green taxation is
far more publically acceptable when linked to cuts in other taxes.
A recent BMRN poll for the new Green Fiscal Commission found 77%
support for green taxes if other taxes are reduced at the same
time. Opposition was at 9%.
Finally, we note the Government's determination
to implement "cost-effective" policies on climate change.
We believe this offers an additional justification for stronger
environmental tax policies—in a 2006 DEFRA study of cost-effectiveness
in the transport sector, the road fuel duty escalator was by far
the most cost-effective policy—at minus £250 tC saved—compared
with major costs for policies such as the industry's voluntary
agreement on new car fuel efficiency.
5. Budget measures—Aviation
The decision to reform APD was welcome, if it
ensures that aviation taxation as a whole increases—aviation
is currently massively under-taxed through its exemptions from
VAT on duty on kerosene. But the decision to freeze APD in the
interim rather than raise it does not send a strong message that
the Government intends to curb aviation's spiralling emissions.
We welcome the Government's work in pressing
for the inclusion of aviation in EUETS, Assuming the current problems
with EUETS can be rectified, it will still be necessary for an
increased use of aviation taxation—aviation will not be
included in EUETS for some years, and the current proposals are
for aviation to receive permits based on the average of 2004-06
emissions—representing a 100% increase over the 1990 cap
imposed on other sectors in the ETS. As the October 2007 Treasury
paper on Stern also points out, other measures beyond trading
are in any case needed to help reduce costs in future years: "One
of the important roles for complementary policies on technology
and behavioural change is to make it less expensive to reduce
emissions overall, although such policies can also have other
important co-benefits. Where caps are not yet at the optimal level
for the desired environmental outcome, such cost reductions can
help to set them at a more ambitious level in future".
(section 1.17).
In this context, a reformed APD taxed per plane
rather than per passenger could improve passenger loading levels
and also drive improved plane efficiency, helping to reduce future
costs. This reformed APD should raise higher revenues than the
present APD—to help ensure that there is an overall effect
to combat overall demand increases.
6. King Review on cars
We welcomed the commissioning of the King Review
of Low Carbon Cars and believe that the interim report, published
alongside the Pre-Budget Report, is a good starting point. We
believe that low carbon cars must make a significant contribution
to cutting carbon emissions from transport. We look forward to
Part 2 of the report and to action in next year's Budget to help
the move towards low carbon cars.
However, in helping to create the longer-term
pathway, the Government must not take its eye off the short-term
priority of ensuring that the EU sets tough, mandatory targets
for cutting carbon dioxide emission from new cars over the next
decade. The Government's support for a target beyond 2012 is welcome
as this is needed to give the car industry a clear target that
fits in with its R&D timelines. However we are dismayed that
the Government is calling for a target that new cars emit on average
no more than 100 grammes of carbon dioxide per kilometre (g/km
CO2) by a date somewhere between 2020 and 2025. We
believe that the target date should be set for 2020 and that average
emissions by this date should be no more than 80g/km CO2.
This is technologically feasible, gives the industry plenty of
time for R&D, and given the scale of cuts required, essential
to ensure the car industry makes a real contribution to cutting
carbon emissions from transport.
7. Silo treatment of the environment
Our final point is to raise concern at the continued
"silo" treatment of the environment, particularly climate
change, within HM Treasury's reports. Stern is clear that climate
change is a major economic threat, and that action on climate
change is the "pro-growth strategy", yet climate change
is still confined almost entirely to Chapter 7 of the PBR. Chapter
4 of the PBR on "sustainable growth and prosperity"
is in some ways far more important for tackling climate change.
Chapter 4 of the PBR mentions in passing that tackling climate
change "presents opportunities for business", but set
out no details of how businesses can be helped to take those opportunities,
as Stern advocated. The productivity PSA does not even mention
resource or energy productivity.
Here was a great opportunity to set out how
the Government will lead the UK's transition to being a world-leading
low-carbon economy, creating hundreds of thousands of jobs in
new technologies, delivering massive productivity gains from energy
efficiency, and making the UK economy far more resilient to global
shocks in oil prices, having a better balance of payments and
greater security of energy supply from reducing our dependence
on imported fuel. This major economic opportunity has not yet
been grasped by Government. Setting out this positive economic
vision and policies to deliver it would have two major additional
benefits. First, it would signal that climate change is no longer
an issue to be treated just as a economic threat, but as an economic
opportunity. This would transform the current political climate
where every action on climate change is seen through a false frame
of being "bad til proven otherwise". Second, it would
signal to the public at large that although climate change is
a big issue, it is one that the Government is genuinely committed
to lead upon. Many people feel fatalistic about the likelihood
of stopping climate change, or that their own efforts would have
much effect. Overcoming this fatalism is to a large degree about
showing that it can be done, that individual efforts are part
of a genuinely bigger whole. Ultimately it is the Government which
must lead the way, and with action, not rhetoric.
1 Primarily on decommissioning nuclear power stations
and support for British Energy. Back
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