Examination of Witnesses (Questions 40-58)
MR CRAIG
BENNETT AND
MR DAVID
HONE
19 FEBRUARY 2008
Q40 Dr Turner: In your view, does
the big business community now work under the assumption that
that emission reduction framework is going to be adopted and does
the business community, the corporate community, see it as a practical
proposition?
Mr Hone: Certainly from this corporate's
perspective we take the view that the world is moving on to a
footing to reduce emissions. That is our underlying assumption
going forward and it is increasingly becoming the working procedure
within developing a strategy within Shell and so on. From my observation
of other corporate organisations that we have contact with, that
is becoming much more mainstream than even a year or two years
ago. As to the magnitude of the task at hand, I think that is
a very separate issue. Having emissions peak by 2015 one might
argue is perhaps on the scale of almost impossible, in part because
there is a built-in lag now in the system that even if everything
we imagine came out of the Copenhagen Process and the Bali Process
it would not really start kicking into action until 2013, which
is the end of the Kyoto Process, so there is a natural built-in
lag in the system anyway. How far we move ahead and how quickly
we can reduce emissions is going to depend on the policy, but
the challenge is certainly there and at Shell we take the view
that this is coming, this is happening, the question is how fast
it can actually be done without severe disruption to society.
Q41 Dr Turner: Do the Kyoto negotiations
as they have been proceeding in Bali give business reassurance
that Kyoto and its international carbon markets will continue
beyond 2012?
Mr Hone: Yes. There is certainly
no doubt in our minds that the carbon markets will continue to
evolve and will expand. That is led by two things. One is that
there are national policy structures starting to appear in a number
of countries around the world who support it, all of which indicates
they are prepared to link with other systems. That is so in the
US, it is certainly so in Australia, it is true in New Zealand
and it is abundantly true in the EU. That in itself sees the carbon
market evolving further than it is today. Whether or not the Kyoto
and Bali Processes can pull that together more tightly and more
rigorously remains to be seen. I think one of the issues is that
there is a lot of focus initially on reduction targets at an international
level whereas I think the focus from an international level needs
to be on the totality of the target, in other words where is the
world going, and, secondly, providing the necessary instruments
and frameworks to facilitate all of the linkage that countries
are clearly willing to engage in, that is beginning to develop
the equivalent of the global currency markets but in terms of
carbon.
Q42 Dr Turner: What confidence does
the corporate community have in carbon markets as a means of actually
delivering the kind of emission reductions we need?
Mr Hone: Very high. I think it
is the only mechanism we can see that fits clearly within the
mandate that business has in society, in other words to respond
to markets. That is principally the mandate that business is given
by society. We do not believe that voluntary initiatives are going
to solve this issue. The better thing is to put in place the necessary
constraints but let the market deal with those constraints in
the way that the market deals with many other constraints in existing
society that are put there for equally good reasons. We have a
high confidence that this will work. You have got to realise that
these carbon markets will not evolve in one or two years. This
is a 20-30 year solution and the markets will evolve over that
period as currency markets have taken many years to evolve. On
the flipside of that, of course, you will recognise that the time
we have for these markets to evolve is very limited.
Q43 Chairman: Just on the question
of the EU offering to go further than 20% in emission cuts by
2020 if other countries do that, what is the way to stop leakage
of very energy intensive industries simply moving to the countries
which have got much less demanding regimes?
Mr Hone: I think the best way
for that to happen is for regulatory frameworks to develop in
other countries. It is unlikely that there will be wholesale shutdown
of European operations and rebuilding them in other countries.
I think that is a story which we should put to one side, largely
because of the huge capital investments required and the capital
already sunk. I think the worry is over time as decisions are
made about new facilities, there could be a tendency to put them
in other places and really the only way to do that is to see that
carbon markets evolve as fast as possible. That means not only
developed countries using carbon markets but developing countries
using them as well. The key there is to encourage developing countries
to see this as an emissions management task. We are too quick
to throw in the words "emission reduction" when we know
developing countries are going to have a rising emission profile
for some time, but a rising emission profile that is managed and
certainly ends up less than what the unmanaged case would be is
really how we should be pitching this for them so there is an
incentive to move into more managed carbon economies.
Mr Bennett: There is a point to
put here which also relates to the previous question, which is
the Corporate Leaders Groups have been quite consistent in saying
that although a strong international carbon market is crucial
as the foundation for delivering change there will, of course,
be a number of other policy interventions needed as well, particularly
around stimulating new markets for new technologies. We could
talk about a whole number of issues, and government procurement
would be one, where if we saw much stronger forward procurement
commitments, say from European Union Member States, that in itself
would really drive some of the markets that are needed to enable
and support new low carbon technologies to come on to the market
and in turn that would provide some of that stimulation that is
needed for companies here in the EU. It really is the point that
we need to see a package of policy measures, and a strong carbon
market would be the absolute foundation to it, but a package nonetheless.
Q44 Chairman: Looking at the banking
crisis at the moment some people are saying the private sector
is taking the profits and the taxpayer is taking the losses. Is
there a danger that carbon markets might develop in a similar
way?
Mr Hone: I think markets will
develop according to the regulations and rules under which they
are governed. Yes, if it is poorly governed and poorly managed
there is always the possibility that will happen but we are learning
rapidly from things like the EU ETS, from the Clean Development
Mechanism, to ensure that will not happen. Certainly over time
there will be examples and we will learn from them as well and
take corrective action, as has been the case in currency markets
and all the other markets that have developed over time. There
will be a learning process and there will almost certainly be
upsets along the way, but we will correct for them.
Q45 Colin Challen: I get the sense
perhaps from the Bali Communiqué and, indeed, previous
communications from the Corporate Leaders Group, the letter to
Tony Blair MP before Gleneagles and so on, that these very large
businesses feel a bit constrained and held back, that they would
like to do more but feel that the political framework has to be
in place so there is a level playing field. I wonder whether or
not some companies actually could do a hell of a lot more, and
perhaps are doing more, and whether it is your view that they
should be doing more themselves. The reason I ask is because some
developed countries clearly are going to have great difficulty
meeting some of these very severe targets. The 80% target in the
United States does look to be quite a test. Could companies not
stiffen the backbone of politicians by actually demonstrating
in a practical, active way that it can be done and that the business
community is not always kicking and screaming against extra measures
but are prepared to leapfrog where it can and say, "Look,
we did it, you can easily manage to achieve these targets or exceed
them"?
Mr Bennett: I will make a very
broad comment on that. If you look at the 170 global companies
that have signed the Bali Communiqué, many of those companies
will have a number of initiatives in place that are demonstrating
in quite a bold way what can be achieved by individual companies
in reducing their own emissions. In many cases I do think those
provide examples that give a very clear indication to policymakers
about the level of ambition that could be achieved. We could look
at a whole number of examples of that but one on my mind at the
moment is one of the construction companies, Skanska, it has achieved
some very strong reductions and has strong targets in place in
terms of the grams per kilometre that it seeks to achieve from
its car fleet, which at the moment go way beyond the European
Union's proposals on this. There is an extent to which looking
at what individual companies might achieve in particular areas
can help guide what might be achievable from the policy frameworks.
Of course, if you are talking about a list of 170 companies it
would also be easy to find examples of where those companies might
be able to do more in particular areas. The common message that
comes from the Bali Communiqué is that it will be so much
easier for business to make bold steps forward in their own operations
if there is that common framework in place and if there is that
leadership from government both in terms of the politics but,
crucially, also the policy frameworks to enable that to happen.
What business wants more than anything is certainty about the
future, about what policy frameworks will be in place and broadly
what strategic direction we are going in. If it sees politicians
and policy frameworks providing that, certainty it will be far
more confident to invest the money necessary in improving its
own operations and, indeed, developing the new technologies needed
to move us to a low carbon risk economy.
Mr Hone: Can I just say something
on that? You need to look really at the bigger picture here, and
the bigger picture, and I said this earlier, is the mandate that
business is given by society is to respond to society's needs
through markets. That is broadly what we do. If the market circumstances
allow for a certain activity to happen you can be absolutely certain
it will happen and by somebody, somewhere, the activity will take
place. We may not like this activity for other reasons, in which
case the way forward to address this issue is to put in place
the constraints so that these activities stop. That is the only
way this is ultimately going to steer on a different course. We
have seen plenty of examples of this in the past. For years there
was concern about clean air in the US and it was all too hard,
it was difficult, "We can't really do that, it will put the
price of the car up too much, the coal-fired power stations will
all shut down". Every reason that you could possibly imagine
was given until the Clean Air Act came in, the emissions from
vehicles were managed, the sulphur reduction programme was put
in, the constraints were put in and the market was allowed to
function and the results show for themselves. The businesses are
all still there and they are all still doing very well, they have
responded to the market. This is about changing the fundamental
rules within the marketplace and then allowing business to respond
to that.
Q46 Colin Challen: Is it possible
since the Corporate Leaders Group was formed to put a figure on
how much the core group of 20 companies have reduced their carbon
emissions over the last four years since you were formed? Is that
an activity which the Corporate Leaders Group engages in?
Mr Bennett: No. There are many
initiatives out there that focus on best practice and aspects
of corporate performance. The role of the Corporate Leaders Group
is to focus specifically on looking at policy interventions that
are needed from government and from regulators to drive the change
forward and that is the focus of the Group. Many of our companies
will be involved in other initiatives that look more at best practice
but we have not done that, no.
Q47 Colin Challen: I was just thinking
that it might help if you could say, "This is what we have
done, please give us more help", but anyway. Moving on, whilst
we were in Australia the Committee was made aware that there is
a growing controversy about a report being prepared by Professor
Ross Garnaut who is advising Kevin Rudd, the Prime Minister, on
climate change, and he perhaps started this controversy by talking
about cumulative emissions by a certain period and everybody was
leaping up and down saying he is now ignoring short-term targets
and we must have these short-term targets if we are going to make
a dent on cumulative emissions. I just wonder what your view might
be on that kind of approach, looking at cumulative emissions,
and whether or not within that period of time when we are trying
to reduce it, different countries in the developed world might
have different pathways to achieving that ultimate objective.
Clearly, if we are saying we are going to have a real tough target
in the EU and Australia goes for something else, that could have
competitive issues and a whole range of things emerging from it.
Mr Hone: Broadly speaking, there
is a job to do which is relatively clear. At some point in the
next decade we have to see global emissions peak one way or the
other and start to decline. At best, we can allow that to stretch
maybe a few more years into the future but we know the risks involved
if we do. The process that is now going on is finding an equitable
way to slice up that task internationally. Whether you look at
current emissions, cumulative emissions, whatever, all it does
is shift that burden slightly one way or the other but it does
not change the nature of the task. What concerns me is that we
could spend another ten years arguing about the ways of slicing
up the pie and meanwhile it rots on the shelf. I understand the
principle but really we need to focus on how to move ahead with
this job. There are some major takeaways that we can start to
put in place that will deliver the outcome and the big ones are
around what is the goal that we are heading for collectively,
how do we implement the carbon markets to start changing investing
flows, how do we implement and expand the project mechanisms so
that they assist in clean development pathways for developing
countries. These are things that we could be getting on with and
doing rather than arguing about the pathway. The US is going to
pick its pathway, the US Congress will decide what that pathway
is irrespective of what the US cumulative emissions are or have
been, might be or will be, similarly in the EU, and that will
be replicated around the world.
Q48 Colin Challen: If we assume that
these different countries will have all these different pathways
and perhaps different ideas about what the ultimate objective
is, it is going to make getting global agreement quite difficult,
is it not, because people will say, "They are trying to freeload
on our efforts" and you will see a whole range of suspicions
creeping in that some countries are just not pulling their weight.
Mr Hone: I think it depends on
what we think of as a global agreement. If we think of a global
agreement where we have decided that emissions have to peak by
year X and every individual country has a particular percentage
then I am pretty pessimistic. If we think about a global agreement
as putting the tools in place such that the markets that I have
talked about can start to be created, I think that is something
we can do in the next two years. Given the society that we have
and the way in which money moves around the world, that is probably
the best way of starting this and recognising that countries are
going to pick this up at different rates. That may not be the
ideal solution but it is probably the one that more rapidly gets
us to some sort of outcome.
Q49 Jo Swinson: Turning to the Clean
Development Mechanism, which we discussed with the previous set
of witnesses, we visited one of the CDM projects in China, which
was a very interesting visit, but what was particularly noticeable
was that there was not necessarily in place robust accountability
standards to prove that this would be genuinely additional and
investment might not have been made otherwise and there could
be a potential in some projects that it might just be abused.
What do you think about the CDM and its future and do you think
it would be better to be replaced with an alternative mechanism?
Mr Hone: The CDM has evolved over
many years now. It was talked about as much as ten years ago.
It has evolved rapidly in the last two years. Of all the various
financial mechanisms that are in place around the world, whether
they be environmental or not, it is certainly one of the more
robust in terms of scrutiny, checking procedures and accountability.
I do not think almost anything has had more written about it than
the CDM and more people looking at it trying to see if it is working
or not. Again, like the EU ETS, it is still in its infancy and
certainly needs to develop further. It needs to broaden its scope
or have other mechanisms attached to it perhaps that account for
things like carbon capture and storage, deforestation and so on,
whether they are part of it or separate. The foundation on which
it is built, which is project-based with a clearly auditable system
of scrutiny and oversight, is a good one and I do not think we
should be too quick to criticise it, which is not to say that
there have not been issues along the way.
Q50 Mark Lazarowicz: I think you
were both here in the earlier evidence session when there was
discussion about other mechanisms. I think mention was made about
mechanisms to avoid deforestation, proposals for aviation tax
to fund adaptation and so on. Have you got any comments on those
two specific proposals? If you cannot today, you can send them
in writing if you want to. What are your views on other mechanisms
that could be brought into play here?
Mr Hone: I do not have any specific
comments on deforestation. What we started with was the Clean
Development Mechanism as it applies to individual projects under
certain circumstances and there is no doubt that has to evolve
and expand. It has to encompass newer technologies, for instance
carbon capture and storage. Somewhere along the line we have to
be able to introduce that carbon price into countries like China
before they have their own domestic cap and trade type programmes,
which they will at some point in the future, those days will come
in countries like China. Long before that you want that carbon
price to be seen there and you want it to be seen by the types
of technologies that are going to be needed there to mitigate
emissions. The other direction that you could go in is to be broader
in terms of its application to programmes. For example, some industries,
like the cement industry for instance is running with programmes
where a number of cement companies are co-operating across the
board in terms of emission reduction, setting benchmarks and so
on, so there are talks about programmatic CDM where you could
apply it to an industry sector in a country, for example. These
are all areas that need to be explored. The idea of the project
mechanism and defining an envelope of activities within which
you can see a change relative to some business as usual projection
is something that we should keep and explore as to how it can
grow further.
Q51 Chairman: Just on the question
of sustainability and business as usual and all that, companies
like Shell, which have got substantial fossil fuel reserves, if
we now accept the urgency of the challenge to cut emissions, are
you starting to factor into your business plans the likelihood
that you will never exploit a significant proportion of those
reserves?
Mr Hone: What we factor into our
business plans is a future carbon market and future constraints
in society related to CO2 emissions and that helps
us see how these various reserves might be developed. One of Shell's
clear goals at the moment is to develop a capacity in carbon capture
and storage so that we can utilise these reserves in the future.
This is really built going back on what we call three hard truths,
in that the three hard truths are that energy demand is accelerating,
the easy fossil fuel reserves that we have had in the past are
starting to come to an end and, therefore, there is a movement
into these sorts of more difficult future reserves, and the third
one being that CO2 is problematic. Nevertheless, meeting
the energy demands of the future is going to force us to continue
to look at fossil fuels, but we have to look at them with new
technologies in mind, and carbon capture and storage is one of
those. These are not necessarily incompatible goals.
Q52 Chairman: Well, what is incompatible
is rising energy consumption and for fossil fuels to remain at
their present proportion of the total if we are also going to
get anywhere near the emission targets that science now says are
absolutely essential over quite a short space of time. Again,
in the previous session the Greenpeace representative was making
the point that CCS might be workable in 2020, 2030 but by that
time we will have used up the whole of the available carbon budget.
Whatever we do after that, if we have not tackled it before 2030
we are done for. So there is a degree of incompatibility there
unless CCS is available far more quickly than anyone currently
envisages.
Mr Hone: I agree with that. CCS
has to be available relatively soon. In terms of major roll-out,
you really want to see it as an off-the-shelf technology by 2020.
In other words, if I am building a coal-fired power station in
2020 onwards it is a no-brainer, that is what I am doing, the
technology is there and off I go. Even that is challenging in
two respects: one, is it early enough, and that is a vexing question;
second, can we even deliver CCS in that timeframe of 12 years.
What you see today in the EU and the US is a very broad range
of companies pressing government to help commercialise this technology.
CCS is a technology that is broadly made up of a variety of other
technologies, all of which are used somewhere for some purpose
or other, it does not exist in an end-to-end format. There is
an anxiety that we need to demonstrate this and that should be
the priority in government and industry together today. Shell,
amongst many other companies, has put forward a variety of approaches
by which that can happen, but it is slow.
Chairman: Indeed.
Q53 Joan Walley: I would like some
help in trying to square a circle. In this session and in the
previous one we have talked about technology transfer and what
I am not clear about is in the submission that you made to our
Committee,[9]
Mr Bennett, you talked about the costs of action, but I cannot
quite see where the whole issue of intellectual property rights
fits in. It seems to me that the innovation and the design of
the new technologies that are going to be needed are absolutely
critical in addressing the whole issue of climate change, but
I am not quite sure where in all the international negotiations
and in all the work that our own Government is doing with industry
we are dealing with this whole issue of intellectual property
rights. It seems to me that is something that has got to be resolved
somehow or another if we are going to be able to get the technology
transfer that we need. In terms of the contacts that you have
with your businesses, how do you see that being addressed?
Mr Bennett: I am sure David will
say more on this in a moment. The first thing to say is this is
not necessarily about new technologies, it is not about having
to invent new widgets tomorrow that we have not yet got. A lot
of the key to this will be about scaling up the deployment and
speeding up the deployment within developed countries, industrialised
countries anyway.
Q54 Joan Walley: Is not a lot of
it about patents that already apply to existing companies and
those companies needing to be able to fund the research and development
that produces the patents that they now do not want to lose the
benefit from?
Mr Bennett: David might have a
point to make on that specific issue. Broadly, the point I would
put forward, which I am told a lot in my role as Facilitator of
the group, is that many of the top technologies already exist,
so it is not necessarily about a big emphasis on research and
development, it is as much as anything an emphasis on deployment.
Take, for example, the one that is very easy to think about, the
shift to low energy light bulbs. It is not as if it is a tremendous
level of patents that are involved in that. The technology has
existed for a long period of time and yet here within Europe my
guess would be that there are a lot more inefficient light bulbs
than new ones.
Q55 Joan Walley: Putting the easy,
low-hanging fruits to one side, there will be issues, will there
not, about intellectual property rights. How does that fit into
this whole equation of how we deal with the technology transfer?
Mr Hone: I think it is a red herring
and I do not think there will be issues about technology transfer
and intellectual property rights. This is a process that already
exists and already works quite satisfactorily. IT technology,
which is guarded by many companies because of the extremely competitive
nature of the industry is spread throughout the world. The Internet
is available all over the world, mobile phone technology is available
all over the world, PCs sell all over the world. Companies take
their technology, find partners in their developing countries,
invest with them and build factories to produce the goods and
services that those countries need and all the while intellectual
property rights are protected by a system that is already functioning
and I do not see that should be any different for the energy technology
industries. We already license technologies in China for advanced
chemical process technologies and so on, coal gasification technologies,
and we find partners in China, we do technology deals with them
or invest with them, the facilities get built and we meet our
business needs. I am not entirely sure that it is the issue that
many people make it out to be.
Q56 Joan Walley: What would you say
to China's suggestion that technology transfer should be mandatory
for developed countries?
Mr Hone: I cannot think what the
technology is that they are looking to be transferred. There is
no shortage of high efficiency vehicles in China. Toyota is building
a Prius factory there quite successfully under existing circumstances.
I really struggle with the issue, not with your question, I think
it is a good question because it is worth having a debate about
it, but personally I have struggled with this issue as to exactly
what is it that people are looking for. I know in Bali, which
I think was of great concern, some people likened it to the technology
behind AIDS drugs, for instance. It is not an example that is
mirrored in the energy sector.
Q57 Joan Walley: Finally, again when
we were in China it was suggested that it was not so much about
the actual technology transfer but it was really about skills.
From the links that you have which bring together business and
the university, what scope do you think there should be or what
scope is there for getting skills up to speed and readily available
wherever they are needed?
Mr Bennett: There are actually
a number of things we do within my department on that. We run
a programme specifically for Chinese leaders around climate change
and work closely with the Foreign and Commonwealth Office in that
regard. As the Corporate Leaders Group we were obviously delighted
that there were five Chinese companies that signed up to the Bali
Communiqué, including some very significant ones like Shanghai
Electric. We have not just let that sit there, we have now gone
back to them and had discussions with those companies and we are
now in the early stages of thinking about how we can move together
in partnership on this issue. The kind of possibility we are thinking
about is maybe having a conference in China in a year's time with
many of the companies that signed the Communiqué and, of
course, as many Chinese companies as possible to really build
that common agenda about what needs to be done to move forward
on climate change and to have a particular focus around skills
as well. We are looking to see how we can really work together
to take that agenda forward.
Q58 Joan Walley: Following on from
the Stern Report, what was DTI, which is now BERR, set up a commission
to look at how to make the next steps in terms of implementing
the Stern recommendations. Separately, for example, in the West
Midlands region there is now a university which is looking at
the whole issue of environmental technologies. Is your work in
Cambridge just focused on the work that you do in Cambridge or
is it linked to other initiatives elsewhere regionally across
the country, because clearly this kind of leadership and bringing
the skills agenda together in terms of the business agenda and
the environmental technology transfer agenda all needs to be somehow
or other connected, does it not? How is that being connected up?
Mr Bennett: The short answer is
to say we try to be as linked in as we possibly can, but often
there are so many links that are open to us that sometimes it
is hard to exploit all of them. I would obviously accept the premise
of the point that it is important to be as networked as we can
on this agenda.
Chairman: Thank you very much indeed
both of you.
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