Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 167 - 179)



  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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