Examination of Witnesses (Questions 140-159)
MR TIM
HELWEG-LARSEN,
MR PAUL
ALLEN AND
DR DAVID
FLEMING
17 JULY 2007
Q140 Mr Chaytor: So you are saying
that you need other measures in addition to the tradable energy
quotas?
Dr Fleming: No, that is intrinsic
to it.
Q141 Mr Chaytor: You have referred
to the carbon budget.
Mr Helweg-Larsen: If I might take
up that point, we started off by saying, "What is the carbon
budget for Britain?" That carbon budget is a budget over
time but it has a budget every year and within that right down
to the week. Those weekly budgets are going to be distributed
under the TEQs scheme; 40 per cent is going to the domestic sectors
and 60 per cent is auctioned to business and industry. That budget,
on a weekly basis, is contracting week by week and business and
individuals will have great confidence in the profile of that
reduction because it will be defined by a carbon policy, much
like the Monetary Policy Committee. We would know that right from
the outset. There is the possibility to adjust that budget, maybe
on an annual or five-yearly basis, in the light of changing climate
science and what have you. In terms of how you achieve the reduction,
you achieve the reduction because you decide what reduction to
achieve at the outset.
Q142 Mr Chaytor: I am still unclear
how the TEQs themselves will result in ...
Mr Helweg-Larsen: We have a budget
each week—
Q143 Mr Chaytor: Yes. It may be somebody
else needs to pursue this line of questioning. Can I move on to
the question of technology. Earlier you drew the analogy with
the Oyster card, for example. Accepting the Oyster card works
pretty efficiently in my experience but the difference is surely
that the Oyster card is voluntary, that not everybody who travels
on the London transport system has to have an Oyster card, whereas
for a successful tradable energy quota system, everyone would
have to be part of it.
Mr Helweg-Larsen: The underlying
question is how do you "force" my gran to take on a
carbon Oyster card when she might have no interest or what-have-you?
Q144 Mr Chaytor: It is a question
of the scale of it also, is it not? We are talking about 60 million
plastic cards as against 500,000 or so.
Mr Helweg-Larsen: Indeed. A carbon
Oyster card is visually quite an easy way to grasp the TEQs concept
but in practice you might find that it is far more seamless than
that. It does not need to be so obvious. It could very well be—I
think you would back me up, David—that if you have an existing
credit card or debit card, your bank might be very keen to provide
you an extra service and have the carbon data kept on that very
same card. If you choose not to engage in any of this carbon trading
at all, you could elect to have your tradable energy quotas cashed
in the moment they reach you and so you just operate in a cash
economy and the vendor of fossil fuels would charge you extra
for the TEQs that they have to purchase.
Q145 Mr Chaytor: On the question
of the role of the banks or suppliers of the card, you referred
to a carbon card, not an energy card. What other infrastructure
would be required to enable the banks to be able to offer that
service?
Dr Fleming: The infrastructure
is minor, in my view, in that the cards would not actually have
to have anything except your account number, which would plug
into the registrar. This is designed based on a system that has
existed for many years of unit trusts. When you buy a unit trust,
your holding is held in a central registry in an electronic way
in exactly the same way—I used to work in the unit trust
industry—and exactly the same system is used for this. All
you do when you have a credit card, you access your account on
the registrar and it is transferred. That is really very simple.
It may very well be that the banks want to provide some ancillary
services and indeed, there would be some services they would provide.
For example, the tender, which of course is very well established
for the issue of Treasury bills, as you know, would in exactly
the same way as is used for Treasury bills, trickle-down purchases
made by the bank on behalf of their customers into customers'
bank accounts. Those accounts would have to be set up but that
is very standard in accounting systems, so setting up another
account for people is just like setting up a savings account.
So in fact, the technology is really very straightforward.
Q146 Martin Horwood: If you have
this account running, what happens when you have used up your
quota?
Dr Fleming: The thing is that
one needs to be aware, even though Tim quite rightly said that
it is issued week by week, actually, on the very first day one
year's supply of carbon release is issued, so in fact there is
constantly a one-year supply in the market as a float, so it is
extremely unlikely that anybody would actually run out, but they
may run out and, if they do run out, it is like going to a petrol
station to buy your petrol. You have to surrender a certain number
of units if you have run out of units or you have forgotten your
card.
Q147 Martin Horwood: If it is likely
to run out, how is it going to change behaviour?
Dr Fleming: What they do is they
buy units on the market on your behalf and so you surrender units.
The answer to your question now is in a way, there is a misconception
unfortunately which Nick Eyre rather produced, i.e. when you run
out, you go into the market and buy some more. That is absolutely
right but the point, the crucial point is that the market is subject
to that quantity constraint, is subject to the budget, so collectively,
the economy as a whole cannot possibly go beyond the budget, and
one needs to recognize that this is a guaranteed scheme; it is
impossible for the economy to use more units.
Q148 Chairman: As you will know with
your experience in the investment world, if someone has sold short,
you get the most enormous price spike. If there is a quantified
total available and someone is short, they have to get their pregnant
wife to hospital by filling up the car with petrol, the price
could be infinite because there is no supply in the market. I
do not want to get too bogged down in details but your answer
there, I do not think, really stands up to scrutiny.
Dr Fleming: Not at all, sir. The
price of units is posted on petrol stations in the same way as
the price of petrol and if for some reason they were to charge
a lot for their units, the price would be on display, and you
could just go round to the nearest hole in the wall and pick them
up there. One needs not to imagine that the world is full of wicked
monopolists.
Chairman: It sounds like the former Prime
Minister saying, "We will march the offenders to the nearest
cash point."
Q149 Colin Challen: The popularity
of the proposal is in some doubt because Defra apparently has
produced opinion research which suggests that 70 per cent of the
population are either not very keen on it at all or may not be
terribly interested and if you look at David Miliband's blog,
you will see there is a great deal of hostility in many of the
comments that are posted. Given that it can be quite difficult
to have a pilot scheme some other kind of evidential base up front
to demonstrate it is quite a good idea, how can you get round
the public scepticism about this proposal in practical ways?
Mr Allen: The fundamental thing
is to get across that the lifestyle changes that people will have
to explore are really related to our bad attitude to energy over
the past 30 years and the failure of markets and governments to
foresee what the consequences of climate change would be. That
is going to cause lifestyle change, not tradable quotas, and you
have to get that shift in. There is going to be some unpleasant
medicine regardless of which type of medicine we take and the
displeasure at the taste should not be related to the medicine
that is chosen but to the illness. Once that is instilled in society,
the question of what techniques can be used to resolve this situation
most equitably would produce a different response.
Q150 Colin Challen: It is a challenge
for the government to try and prevent the unpleasantness from
happening by introducing far-sighted, radical policies such as
this perhaps to head off a crisis but until we have the crisis,
as you say, perhaps people will not be so keen to engage with
the policy. That is the conundrum that we have to resolve.
Mr Allen: The first scientific
musings about carbon emissions were 100 years ago and if we had
had the foresight in the 1950s and developed along a different
technology line, we perhaps would not be in this situation now.
It is essential to separate the actual tradable quotas from the
bigger problem.
Q151 Colin Challen: How do you sell
the policy as a positive product to peoples whose backs are against
the wall?
Mr Allen: We also have to look
at what other changes we need to make in society. We need to change
people's health, we need to change people's diet, we need to change
people's levels of fitness, we need to improve levels of social
cohesion and community purpose. There is also a big need to deal
with personal debt. If some of those can be instilled as additional
benefits of re-thinking our attitude to energy, there are additional
benefits we can explore.
Dr Fleming: May I pick up your
point about motivation? I have five points and they may all be
significant. Number one is a piece of research on motivation in
Canada, particularly with old people and they are now extending
it to the population as a whole, which shows a bimodal result.
When they say, "What you think about the idea tradable energy
quotas or personal carbon allowances?" they say, "No,
not on your life. What a terrible idea." Then they have a
discussion and talk about why they may seriously be needed and
why they are the best solution, and the reaction changes completely:
"This is absolutely right, and not only that, we will show
other people how to do it." If it is well expressed, there
is a complete flip in opinion. That is the first point. The second
point is that we do need to recognize that there are these energy
problems and if we are—and I think it is a matter of when
we are—in an energy crisis, people will be on their knees
for a rationing scheme. They may call it an entitlement scheme
or whatever but if you have a rationing scheme, you can guarantee
that when you want to buy your petrol, it will be there for you
and it has your name on it. Without a rationing scheme people
will be in trouble. The third point is when people say, "What
would the effect of this scheme be? What will people think about
it?" one absolutely has to say it depends on how steep the
carbon budget is. If the carbon budget was hardly doing anything
at all, it would actually have no effect on our lives whatsoever.
So the whole effectiveness of it, the whole reaction of it, depends
on the steepness of that and there will need to be a clear communication
and interaction between the Carbon Policy Committee and the economy
and people as a whole, working out how steep they can make it.
There is no sensible answer to motivation and what people's reaction
will be unless one specified the budget. The fourth brief point
is that this will be a wonderful opportunity for the government
really to do a useful job and to be on our side, because the Energy
Policy Committee are the nasty guys but the government becomes
the nice guy because the government is also part of the scheme;
they too have to buy their units and therefore the government
is not say "We are going to impose this taxation, this regulation,
and if it is not hurting, it is not working." They are going
to say, "We are all in this together and we are going to
work with you on enabling you to actually achieve this."
If someone is in trouble because they only have a three-bar electric
fire for an enormous stone-built house, okay, we are going to
help you in whatever ways come to mind, with money, with technology,
with help and advice, in whatever ways come to mind so that the
government is part of the scheme so that actually means there
is a sense of common purpose. Finally, it is a sense of at last
there is something to do; we can do something about it. I think
one of the reasons why there is a reluctance to accept the climate
change problem and the energy problem is that people do not know
what to do about it. There is the law of reverse risk assessment:
it is much easier to recognize a problem if you think there is
a solution and if people say, "Yes, not only do we have this
problem but we also have this solution" that could be fantastically
popular and, as Tim said in his excellent report, it could even
be a vote winner.
Q152 Colin Challen: The zerocarbonbritain
report does foresee this scenario of a steep reduction in carbon
emissions, which obviously affects our habits in relation to the
use of energy but how steep can it be to be publicly acceptable?
If you have a very steep curve downwards and that means the price
of carbon rises very quickly, I would assume, people might be
tempted to say, "Great! We have a windfall. We will go out
and sell our units straight away," and obviously they may
then learn there is a price to pay later on. If we did not have
a steep curve, that might have greater public acceptability because,
as you were saying, you could start off flat and it would not
have much of an impact until you get the system embedded. What
is the optimum curve to introducing this?
Mr Helweg-Larsen: I think the
first thing to say is let us look at this as an emergency and,
if this is an emergency, the public needs to understand this issue
as an emergency and then our actions can be framed by that context.
One of the things that I found quite invigorating and uplifting
as we came to the conclusions of the report was that we did not
when we set out know what carbon reduction we were going to be
arriving at. We had not done all of our reading on the climate
science at that point but as we worked on through it—and
I am going to digress briefly into climate science—two key
things came out. One is that we now understand from the contributing
authors of the IPCC that there are numerous and very powerful
feedback mechanisms in climate change and that this is leading
us to an understanding of climate change. If we look at it as
an explosion or as a bomb, the carbon emissions and our greenhouse
gas emissions are much more of a detonator. The feedbacks represent
far more the main charge, so there is this new perspective that
we are just on the trigger really of this bomb. The second is
that, because the atmosphere is cumulative in its concentrations
of carbon dioxide and greenhouse gases, and because we are starting
to realise that there may be significant sink failures to pulling
those emissions back out and that the sinks do not grow at the
same rate as our own emissions, it may be that we cannot add any
more to the cumulative concentration of atmospheric greenhouse
gases. It may be that we absolutely cannot add to that, and that
means not emitting; that means zero carbon emissions, so it is
zero carbon emissions probably yesterday. How fast? It is what
I was touching on at the beginning; we need to frame it in that
context and then, if we see that we are going to zero emissions,
it puts a very different perspective on it than thinking about
a 60 per cent cut or an 80 per cent cut or a 90 per cent cut,
which just seems more and more constrained and impossible and
you get to a 100 per cent cut and you say, "Am I dead yet?"
The answer is no, there is life beyond carbon and it is quite
refreshing to start exploring just what we can do.
Q153 Colin Challen: That makes very
clear the nature of the emergency, which I think most of us in
this room would agree with, but most of the people out there have
a different idea, as perhaps evidenced by the polls that you referred
to. A radical measure would not be welcome so the question remains
politically how do you get from A to B and how do you sell the
idea as a positive, good thing for people to engage with?
Mr Allen: I think Britain has
a network of museums, galleries, science and discovery centres
which are not engaging with this issue at all, and we have a National
Curriculum which touches on it but does not really get to the
core of what Tim has just said. If we can get the attitudes to
the problem out there to be the same as the attitudes to the problem
in here, then we have a fertile ground for introducing some sort
of equitable system for dealing with it. The optimum carbon descent
steepness curve is the one that begins immediately. The longer
we leave it, we are moving away from the optimum because we are
making the descent steeper and steeper, and therefore the social
transition harder.
Q154 Colin Challen: Your memo has
suggested that there should be an independent body created called
the Carbon Policy Committee. I wonder if you could just say what
differences that might have in comparison with the Government's
proposal in the Climate Change Bill for a Carbon Committee.
Mr Helweg-Larsen: I think under
the draft Climate Change Bill the committee that is envisaged
is similar in name, but very weak in structure. It is nothing
like as rigorous or as independent or as powerful, I suppose,
as the Monetary Policy Committee that we have today or the Carbon
Policy Committee that is envisaged.
Dr Fleming: Is it permissible
to answer your previous question?
Q155 Colin Challen: Sure, with the
permission of the Chairman.
Dr Fleming: The question was what
would happen if the budget went down so steeply that the price
rose and that would encourage people to sell, and there are three
brief answers to that. The first thing is that the price absolutely
does not matter. One of the fundamental rules of system design
is that if there are two variables, one only has one degree of
freedom. That is to say, if we have two variables, one is quantity
and one is price, but it is only quantity that matters. Price
can be flexible and it is because of that flexibility that the
system works. It applies to any system. Lots of people do think,
"Oh dear, supposing the price fell very low, the government
would have to intervene." The price is completely irrelevant.
It is entirely the quantity that matters. Because of that, the
system provides a guarantee. The second point that is relevant
is that we may well under-estimate the extent to which the political
economy is able to reduce our carbon emissions. Terry Barker at
Cambridge has done some interesting work on that and described
something called "the announcement effect". The government
does not even need to impose an instrument; all it has to do at
the very start—I am not saying it is a substitute—is
just to announce it and immediately there is clear evidence that
people are reducing their energy demand. So in fact there is a
substantial degree of softness in the economy and I think we would
be surprised, certainly in the early years, how much the economy
could actually respond when the energy availability goes down.
The third point is that a steep carbon budget would have lots
of very clear benefits. One clear benefit is that it would enormously
improve our security because, as energy gets scarcer and as the
agenda for climate change becomes more severe, any economy which
is already a long way down in terms of their energy consumption
will have an advantage. They will be more secure, they will have
a competitive advantage, they will be less liable to disruptions.
Clearly, all the motivation is towards a steep carbon budget.
Q156 Martin Horwood: If that steep
carbon budget happens, is there not a risk? You say quantity is
the thing that matters and price is irrelevant but price will
have a huge impact on individuals. You can imagine a scenario
in which rich people see the way this is panning out, fork out
on all the photovoltaics, put ground source heat pumps in their
swimming pools, they buy a brand new car which has a zero carbon
footprint, and they use what of their quota they do not want to
sell to pay for their holiday because that is the only way you
will be able to afford it under this steep carbon budget. Poor
people find themselves with a bit of cash if they have a relatively
low carbon footprint are actually also trapped in houses and with
cars and lifestyles that they cannot change because of that need
for capital expenditure. So they end up perhaps with a bit of
cash but unable to travel in the way that they could, probably
unable to afford a holiday because the TEQs required will be beyond
their means. This could be a very unequal system in the way it
actually pans out.
Dr Fleming: I do not think I can
really bear out that argument, for two reasons. One is that the
higher the price, the greater the motivation there is for the
poor to in fact reduce their carbon emissions and the more money
they will get in when they can sell their surplus rations. One
of the things which will be intrinsic with this will be that the
government, which, as I said earlier, will be the good guys, would
enable the poor—it would be an absolute priority—to
reduce their carbon emissions and it will have enormous effects
such as location of shops and location of jobs versus living.
Q157 Martin Horwood: I am sorry to
interrupt you but that is new development. Most people have to
exist in the world that exists now, where their shops are now
and the way the housing estates are designed now. I can afford
to put solar thermal panels on my house to reduce my carbon footprint
but most of my constituents are not going to be able to afford
that.
Dr Fleming: That is music to my
ears, Mr Horwood. You are completely right. I am talking about
transition here. The carbon budget goes down steeply but gradually,
that is to say, there is a transition. It is hard to define in
terms of words what it is. If one immediately has a one-step crash
in the carbon budget down to nothing, which could indeed happen
from the point of view of the energy market, but leaving that,
if there were a one-step crash, then indeed there will be a one-step
crash in poor people's behaviour but, as well as talking about
a transition and as well as talking about this common purpose
and this collective motivation, the thing does become really a
matter of working together, and far more likely than your appalling
scenario of the rich people getting into their Jaguars and driving
to Spain or whatever it was, it is much more likely that there
will be some communication between the rich and the poor.
Q158 Martin Horwood: My point was
that rich people can afford to buy their way into a low-carbon
lifestyle in a way that poor people cannot because their lifestyle
choices are much more constrained. They might end up being the
losers. Although they are relatively low now, they might end up
relatively high.
Mr Helweg-Larsen: Perhaps I can
respond on this. You are pointing out that there are going to
be households who do not have the disposable income to switch
to energy-saving appliances, that do not have the disposable income
for insulating their lofts and, as the carbon budget shrinks week
on week, they are going to find themselves in the position where
they actually have to purchase extra TEQs on the market. Yes,
absolutely. The scheme provides us with a core driver out of carbon
in a race out of carbon. It does not fill every last nook and
cranny. Not wanting to be derogatory, it does not solve all the
world's problems but built into the scheme, given that 60 per
cent is being auctioned to business and industry, if the price
were to go high, to the extent there is value to these tradable
energy quotas, there is a significant income to government to
work with those groups which would be most disadvantaged and so
there is going to be significant funds. There is also going to
be an obligation on government to provide secondary legislation
and to find all sorts of interesting ways to back that up. We
have to prioritise the primary problems of climate change and
access to fuel at all, and recognize that there is going to be
no equity in a climate change disaster and there is no equity
in a situation where fuel is completely unavailable to anybody.
Q159 Martin Horwood: Two final questions.
Why are children not included and why weekly allowances?
Dr Fleming: Everybody is included,
including children. Children are just included in a different
way, that is to say, there could be changes to the family allowance
and such things. The idea of someone as soon as they are born
qualifying for a full adult version of the TEQs ration seems to
me bizarre. The point is the scheme has a core. One can talk about
the hard core and the periphery. That is peripheral. At the moment
it is designed so that children are included through family allowances
and then they get their adult ration at the age of 18.
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