Examination of Witnesses (Questions 167
- 179)
TUESDAY 30 OCTOBER 2007
DR IAN
BAILEY
Q167 Chairman:
Dr Bailey, this is the first time you have given evidence to this
Committee and we are grateful to you for coming in. We are in
an unusual situation this morning in that we will not be allowed
to sit once the House prorogues so whereas normally we can let
things run on a bit, we have to be a little bit tighter on our
timing and more disciplined, which is usually something my colleagues
on the Committee struggle to achieve! As it is your first time,
would you like to introduce yourself and say a bit about your
background.
Dr Bailey: Yes of course, and
thank you very much for the opportunity to be here today. My background
is one of being a political/economic/environmental geographer.
I am not a trained economist but my research over the last ten
years has focused on issues of environmental policy implementation,
in particular the impact of things like negotiated agreements
and market-based instruments on industry behaviour and how basically
business managers respond to the price incentives with which they
are faced and, if you like, the geographical and market complexities
of translating environmental economic theory into practical policy.
I have been doing that for round about ten years, firstly in the
field of waste management and since about 2000 in the area of
climate policy, looking primarily at the United Kingdom, Germany,
the European Union, and also more recently Australian experiences
with negotiated agreements.
Q168 Chairman:
Okay. With the benefit of that experience, would you like to tell
us what you think about the effectiveness of the Climate Change
Levy and the Climate Change Agreements?
Dr Bailey: I think they were all
very useful starting-point instruments because the package as
was put together in 2001 did provide an avenue to make a fairly
fundamental change in the way business thinks about energy efficiency
and make it more palatable to ease businesses towards this form
of regulation. I also think, however, that the initial impact
of those instruments in terms of raising business awareness of
energy efficiency had a fairly limited shelf level in so far as,
as I understand it, there was a pretty low starting base point,
and the initial impetus gained will gradually be lost unless,
for example, the price incentive of the Climate Change Levy is
substantially increased—and some of the difficulties of
that have already been broached this morning and, if you like,
the low-hanging fruit get rapidly exhausted by business leaders
and that begins to pose difficulties, so I would expect to see
a process, if policy is not changed, of diminishing returns. I
have limited confidence in the EU Emissions Trading Scheme to
fundamentally reverse that situation, for reasons which perhaps
I might have the opportunity to come on and explain. I have spoken
to an awful lot of business leaders over the course of the last
ten years. The first of the two key issues that I would like to
highlight from the outset is, as Joan alluded to in the last session,
the step changes in investments needed by, particularly, energy-intensive
industries to make a fundamental difference to their emissions
profile. That raises all sorts of issues about capital availability,
capital affordability, and persuading chief executives to accept
those quite significant investments. Allied to that of course,
there is a lot of vintage capital we are talking about in energy-intensive
industries, ones which have very long pay-back periods, and that
only increases the obstacle as far as I can tell to the step-change
sorts of investments. Another complicating factor which is coming
out quite strongly at the moment is the variability of base energy
prices, particularly when we look at the base oil prices over
the course of the last three or four years or so, and how that
interacts with a market-based instrument and how that creates
long-term security as far as energy-intensive industries are concerned
for planning these major investments.
Q169 Dr Turner:
You have written academic papers that have some fairly critical
things to say about the way economists design and evaluate policies
such as the Climate Change Levy. Could you expand on that a bit?
Is this a criticism of fellow economists in designing fiscal instruments?
Dr Bailey: I would not like to
think that I am too critical of economists. I suppose as a geographer,
I am naturally interested in—
Q170 Dr Turner:
You are not an economist?
Dr Bailey: I am not an economist.
Q171 Joan Walley:
He made that quite clear!
Dr Bailey: As a geographer, I
am interested in the complexities of the real world, as it were,
and policy implementation. Environmental economic theory is based
on a number of assumptions about market behaviour and competition,
and my task in my research is to explore how well these actually
pan out in the real world. What I have observed from the research
that I have done is an awful lot of factors which complicate the
relationships which are put forward. I am not saying that the
relationships do not exist between price incentives and corporate
responses, but one has to take into account differences in sectoral
make-up, ownership, and so on and so forth, geographical differences
obviously between different countries, and the regulatory frameworks
within which they operate, and a whole host of other factors,
which means that this idea of economic rationality in terms of
response is one which is very difficult to observe empirically
when one is speaking to these people. Just to add to that of course
because I spend all my time speaking to business leaders—and
one could level the charge at me that I have been captured by
industry interests—I would like to think that I am reasonably
discerning in terms of how I unpick what we might call the smokescreen-type
arguments from the real difficult structural issues that many
energy-intensive industries are facing.
Q172 Dr Turner:
The situation is summed up in some evidence that we have had,
and I quote: "Organisations have not responded to Climate
Change Agreements in the rational manner predicted by economic
theory." Given that the entire package of policies aimed
at businesses in the UK Climate Change Programme is designed by
economists, that is quite a serious statement. Do you recognise
that and what do you think it implies for the Climate Change Levy
package and other market-based approaches?
Dr Bailey: Is that a quote from
myself?
Q173 Dr Turner:
No, it is from AEA Energy & Environment.
Dr Bailey: I have a lot of sympathy
with the statement, yes, I think there is a lot to be said for
that. The implications it has are principally that over-reliance
on the price mechanism and markets, howsoever constituted, whether
through a tax-based mechanism or a trading-based mechanism, maybe
addresses part of the problem by making sure that polluters pay
for their emissions, however, it does not address some of those
more structural constraints facing decision-makers within industry,
and particularly their capability to effect the sort of large-scale
investments that are necessary. I think as an overall summary
of the implications, it says things like the Draft Climate Change
Bill have put forward ambitious emissions targets for the United
Kingdom. Whether the current package of instruments stands any
chance of coming close to that, I have to say I have strong reservations.
Q174 Dr Turner:
You obviously know about the forthcoming Carbon Reduction Commitment.
What are your views on the design and likely effectiveness of
that?
Dr Bailey: I have not studied
it in detail because I have been focusing predominantly on the
EU ETS, so I have been listening very interestedly to the preceding
session. However, I think it does many of the same things as emissions
trading and I think it possibly addresses the same issues and
fails to address the same issues, and the issue in particular
is this idea of capabilities and bringing about step changes in
investment.
Q175 Martin Horwood:
It is becoming a bit of a theme of this inquiry that companies
are refusing to behave in the rational way that economists want
them to. You in your academic papers seem to be arguing, I think
the phrase was, for more interventionist strategies. We are inquiring
into market-based mechanisms, but are you saying that the market-based
mechanisms are a bit of a red herring?
Dr Bailey: I was re-reading the
abstract of the paper where it had the word "interventionist"
and I was reminded that I had great difficulty finding the correct
word, and I am still not sure that I found the correct word.
Q176 Martin Horwood:
I was going to ask you what do you mean by more interventionist
strategies? Do you mean getting away from market-based mechanisms
altogether and going into regulation and subsidies?
Dr Bailey: No, I am generally
supportive of the package of instruments that has been developed
in terms of the CCL, CCAs and EU ETS. However, I think I differ
from Professor Grubb in terms of my degree of supportiveness of
the idea of recycling monies directly back to reward energy efficiency
investments. I think reliance on the market and the price mechanism
component of the market to achieve that may well get nowhere near
where we need to be on all this, and when I say interventionist
I am talking basically about hypothecation.
Q177 Martin Horwood:
So you would support hypothecation from this?
Dr Bailey: I would support the
continued use of the Climate Change Levy and the EU ETS, but I
would be thinking in terms of how can we create a more direct
link between the revenue that is raised from things like the Climate
Change Levy, or potentially through greater auctioning of EU ETS
allowances, and creating financial incentives for businesses to
invest by getting a positive financial incentive, if you like,
to invest in energy efficiency. That might be quite a naive view
from an economist's point of view, but it is where my investigations
have tended to lead me.
Q178 Jo Swinson:
Going back to one of the barriers that you cited for why there
have not been further cuts in emissions, which is the lack of
the capital required for these step-change investments in technology,
in your view what is the scale of investment that is required
and how should that be funded?
Dr Bailey: To be honest, I do
not have any view. I do not have enough knowledge to be able to
make a sensible comment on the levels of figures. We are talking
about very substantial funds and I would not foresee that if all
the revenue that was gained from the Climate Change Levy were
recycled back through the sort of schemes we have been talking
about in the preceding session that would meet the requirements
of the task. I could possibly see greater potential from fuller
auctioning of EU ETS permits but, to be honest, I do not have
a figure.
Q179 Jo Swinson:
But you think it is a question of money; it is not a question
that the technology is not out there yet? You think the technology
is there, it is just a question of investment?
Dr Bailey: The best thing I can
do is to report the findings of the various people that I have
spoken to. The issue of the actual existence of technology seems
to be a lesser issue for most of the energy incentive sectors
that I have spoken to. The greater issue is the affordability
of that technology and the various either internal company financing
requirements or the need to go out on to open capital markets
and persuade other investment organisations to invest in things
which have got a very long pay back lead-time.
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