Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 120 - 127)



  Q120  Peter Viggers: The Pre-Budget Report in 2006 states that only 7% of allowances will be allocated via auctioning in phase 2. Is this enough, or would you prefer to see more?

  Ms Hampton: We believe that you can have 100% auctioning in the power sector because it can pass on the costs to customers and is not exposed to international competition. For other sectors it will depend a good deal on what other countries do and for those one can use a combination of auctioning and efficiency benchmarks. But we need to see a lot more auctioning that is centralised and harmonised across the EU, and the timing and frequency of auctions is quite important to the market. If countries are able to decide how much they want to auction and how they do it that will not be the most efficient way to do it.

  Q121  Peter Viggers: It is a global problem. Do we have global institutions which can handle it? There has been reference to the EU. So far in this evidence session there has been no reference to the OECD which has been very active in this field.

  Ms Hampton: The OECD does not have the direct regulatory role. I think that it provides very useful input, for example through the Annex 1 Expert Group, on the evolution of carbon trading and international negotiations under the UN Framework Convention. I think that the institution that is worth focusing on is the CDM Executive Board which basically acts as a regulator for project-based reductions which flow into the EU scheme but can also be used by governments in Kyoto compliance. That particular institution started off as quite politicised; it is now being professionalised. However, the movement of projects through that system is still quite slow. That is being sorted out but the process could be accelerated somewhat.

  Q122  Peter Viggers: Given the problems with the Doha round, how optimistic are you about international development?

  Ms Hampton: Certainly there are parallels. What we see in the emissions trading world at the moment are national schemes which will bubble up like the EU scheme and they will become linked. But one will always need an international regulator to guarantee that a tonne of carbon in China is the same as a tonne of carbon in the UK. Schemes can develop around that and there will be differences between schemes. There is some flexibility for a range of institutions in the emissions trading scheme, but there must be one yardstick. I am quite optimistic that that can continue because Kyoto sets out that framework of monitoring and verification and the CDM Executive Board and other institutions do that job quite well. Those institutions are, however, under-resourced both in terms of staff capacity and finances.

  Mr Roberts: I am not quite sure I share the optimism. The picture of the kind of institutions that one needs to build is right, but there is now a tendency to say that we have not quite got the institutional framework right and we should not really do anything yet. We come back to the point made earlier by Ms Hampton that some of these emissions are not moveable; they are not subject to competitive pressures, and the need to set up some international system for trading and management is to deny the fact that a lot can be done at country or regional level which can then be joined together. What is important is that one starts to map out what the rules would be for an international system so one build that into it and joins together any more regional systems. One certainly does not need a global system to kick off, as the EU ETS shows. I think that that could go a lot further before we need to worry about it.

  Q123  Peter Viggers: There is a risk that rich countries will lecture poor ones who feel they cannot afford to participate. How does one sell that story to the poorer countries?

  Ms Hampton: I think that the carbon pricing story and emissions trading piece fall out of a much broader discussion about energy and climate security. There are a number of emerging economies in between the developing and developed world, for example Mexico and Korea, which have recently become industrialised. They are starting to look at emissions trading very seriously and they can take that on. The next group comprises countries like China and India which will probably engage on a sectoral basis to start with, and that is very much where the international negotiations are focused. One may have a one-way target for a particular sector and it is one of the proposals on the table: if they over-achieve they can sell that carbon into the global market; if they under-achieve they do not face the same kind of compliance and penalties that, say, the EU would. There is a range of things that developing countries can do on the road to a fully capped system, but I think it is unrealistic to expect most developing countries to accept the cap beyond maybe some sectors that they may want to volunteer, apart from those countries which are in the OECD or are borderline at this point.

  Q124  Mr Breed: If we can take a brief look at current environmental taxation, Friends of the Earth has described to us that the climate change levy is the Government's environmental tax success story. What do you believe are the features that has made it a success, if you believe it is? To what extent can that perhaps be replicated in respect of other environmental taxes?

  Mr Roberts: I think I will have to pass on that. I do not have enough information available to say whether or not it is a success story. I think that what it did at the time, even though it is not a huge price signal, was signal intent and a government position which meant that industry could see where things were going. The significance of it lies not so much in the price signal as the fact that it demonstrates a bias towards low carbon behaviour over high carbon behaviour. I do not think that it would fit particularly well the criteria for a logical and transparent system, but it signals to industry that it wants to see carbon emissions coming down and it is prepared to release it from the tax burden if it can show what it is prepared to do. But one would still want to see what came out in the wash at the end of all these voluntary agreements before one could conclude that it was a success in that respect.

  Ms Hampton: If one uses taxation in combination with other instruments one could get some quite useful outcomes. The climate change levy of itself would not have achieved what the entire policy package around it did. One matter mooted by colleagues at Climate Change Capital is the idea that in the absence of a long-term signal from the emissions trading scheme the Government would institute something like a price floor through a carbon levy or tax. Basically, if the international or European price of carbon fell below, say, €15 per tonne it would levy a tax to continue to penalise business at that level. That could provide a long-term signal to drive long-term investment decisions in the absence of a longer-term agreement. There are things that national governments can do through their taxation systems that cannot be done internationally. Looking at the complementarity of those different instruments is definitely something worth exploring.

  Q125  Mr Breed: In respect of climate change, what do you think is needed now? If one were to recommend just one thing to bring about wholesale behavioural change what would it be?

  Mr Roberts: I think that we need to see far more money going into education both within schools and more broadly. If one looks at the Energy Saving Trust budget, it has been static for five years. That is the main vehicle used by the Government for communicating with individuals about these issues and providing support and advice. One could envisage a huge expansion of that and build on it. As to immediate matters, I think that the Government must get their story straight on the message. We all want to get individuals, businesses and national bodies working together. So show what it means in practice and be clear about what different parties are bringing to that, and also why it is important for the UK to lead, not because it massages some political ego on the international stage but because it shows we can lead the dancing in the international process of getting negotiation together and take responsibility in relation to that. I do not think we have yet got that. We saw that with Stern. "There is no point in acting unless China does it". We saw it with the launch of the Climate Change Programme review. "It would be nice if individuals acted too" (as though somehow they did not need to before). I think we need to find a way to go beyond this confusion so we have a clear framework of communication and a lot more resources going into education and awareness-raising, backed up in the medium term with something that really brings individuals into the carbon trading system, raises their carbon-consciousness and makes it part of their major decision-making in terms of both individual behaviour and purchasing decisions.

  Ms Hampton: In terms of imminent action, I think that the Spring Summit in early March where EU heads of government will get together and talk about the EU energy package is potentially a very important political moment. The Commission has put forward an ambitious and coherent package which should be welcomed, but it could be unpicked by individual Member States as they try to undermine the mandatory nature of some of the targets or take an a la carte approach to the instruments on the table. It would be very dangerous if particularly the UK Government on the basis of subsidiarity started to say that there should not be mandatory renewable standards or for carbon capture and storage at EU level. There is now such a level of urgency and scale required to address the problem that some of these issues have to be dealt with at a point beyond national level. The UK Government could make that moment important by working very carefully with other heads of government so there was less in-fighting between industry ministries and environment ministries, which have plagued the implementation of most climate legislation so far, and there was a firm commitment to provide long-term carbon signals up to 2025 which have a real impact, and do something about the demonstration of carbon capture and storage and the commitment to build 12 plants across the EU by 2015. If we do not take the carbon out of coal we do not solve the climate change problem. In addition to the stuff that needs to be done locally, at national level and by individuals some of the big picture stuff is absolutely essential.

  Q126  Chairman: The Stern Review says that there will be costs from climate change and preventive measures alone will not make up for that, so there needs to be adaptation. Is adaptation featured strongly enough in the debate, and could more be done in that area?

  Ms Hampton: In the history of the negotiations adaptation has tended to be used as a card played by countries like the US and Saudi Arabia as a way to divert attention away from mitigation. I believe that that has slowed down an intelligent debate on adaptation. That is one reason why it has not played a big part. Another matter is that it is quite difficult to differentiate between sensible adaptation and just sensible sustainable development. If one looks at water or forestry policy, to do things that are sensible from the point of view of sustainable development also improves one's resilience. There has not been enough attention paid to adaptation. As for a lot of the climate impacts, people do not necessarily have the local resolution they need in climate modelling.

  Q127  Chairman: What could the Treasury do to highlight the required expenditure on adaptation as a way of raising public awareness of the current cost of climate change?

  Ms Hampton: The UK is doing better than other countries through its Climate Impact Programme, but I think that adaptation really needs to be factored into business decisions and local government decisions to an extent that is just not happening at the moment. The water sector has started to think about it but possibly that is the only sector that has. One needs a much broader approach. On the international side, we are not doing anything to tackle the problem that is increasingly being faced by developing countries. Look at the Horn of Africa and other places. We have not even started with that.

  Mr Roberts: I agree that there has been to some extent a morally odious use of the idea of adaptation, and in some of the impacts discussion there has almost been a sense that it could be positive. We have heard some discussion in the South West to the effect, "Where are we going to grow the wine?" One can already get some very good wine from Cornwall. In a way, it comes back to communication. The problem is that one already has adaptation costs; one already has to deal with flood defences. Stop building housing in flood plains which planning systems still do not manage to prevent. We also need to communicate those as costs that are already sunk. Some of the environmental groups tend to say that unless we change our behaviour we will have all these costs. That kind of equivalence is not there any more; we have the costs anyway and we need to change our behaviour to stop them rising even further. I still think that we have not managed to get across that point.

  Chairman: Thank you very much for your evidence which has been very revealing. It has been a worthwhile morning for us.

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