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Westminster Hall

Thursday 18 June 2009

[John Bercow in the Chair]

Personal Carbon Trading

[Relevant documents: Fifth Report from the Environmental Audit Committee, Session 2007-08, HC 565, and the Government’s response, Session 2007-08, HC 1125.]

Motion made, and Question proposed, That the sitting be now adjourned.—(Joan Ruddock.)

2.30 pm

Mr. Tim Yeo (South Suffolk) (Con): I welcome you, Mr. Bercow, to the Chair this afternoon. This is possibly the last time that you will chair a debate in Westminster Hall if you are called to higher things on Monday. As I have informed you, my vote in the first round is pledged to another hon. Member. However, your performance in the Chair this afternoon might sway a few floating voters to switch in your direction, so this could be a sort of hustings for the Chair.

I also welcome the Minister and the shadow Minister. We look forward to hearing from both of them. I particularly want to thank my three colleagues from the Committee for their participation and support this afternoon. They are three of the most conscientious and hard-working members of the Committee. Between the four of us, we carry quite a heavy load, as a number of Committee members have not been seen for some years. Unfortunately, my request for the Committee to be reduced in size was rejected by the Leader of House last year.

I am delighted to have secured this debate. It is a very important subject and one that needs to be more widely debated. It is a year since we published the report under discussion, and it is seven months since the Government published their response. During that year—even during those seven months—the scientific evidence has shown that the challenge that the world faces from climate change is bigger and more urgent than we previously understood. Despite many commendable initiatives, no country—not even Britain—can claim to be anywhere near being on track for the scale of greenhouse gas emission reductions that are needed. It is a chilling reflection that no country has ever achieved a sustained fall in greenhouse gas emissions except at a time of severe recession or de-industrialisation on the scale seen in the former Soviet Union in the early 1990s.

It is equally clear that in the next decade, every developed country in the world must start doing what no country has ever done, which proves just what a dramatic change of pace and scale in our response to climate change is needed. If global emissions do not peak by 2020, the scale of the cuts needed thereafter to keep the rise in average global temperatures anywhere near 2° C would involve a cost and a disruption that would be painful and expensive for every section of the community.

So, whatever we are doing now by way of generating low-carbon electricity, constructing more energy-efficient buildings, developing low-emission vehicles and so on, it is nowhere near enough. Investment in renewable
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energy, tax breaks for greener cars, and building zero-carbon homes are all needed and, to a greater or lesser extent, are being encouraged through policy and regulation. However, much more still needs to be done by Government, and by business, which has shown itself to be increasingly forward looking in its response to the challenge and in its ability to see the opportunities and threats for its business models. That is particularly true in the United States where business until very recently has been well ahead of policy makers. However, this is not just a matter for Government and business. Every single citizen as a consumer needs to be directly engaged in the battle against climate change. That is why personal carbon trading deserves far more attention than it is getting, either from the Government or from other people.

Personal carbon trading offers three unique advantages compared with carbon taxes. First, it can guarantee that a specific level of emissions is achieved in a way that carbon taxes cannot. No one can be sure of the elasticity of the response of consumers to carbon taxes. We have seen in many areas remarkably inelastic responses to carbon taxes. Secondly, personal carbon trading can, and should, be progressive and not regressive in its impact on low-income individuals and households—unlike carbon taxes, which are nearly all somewhat regressive. Thirdly, personal carbon trading allows individual discretion about how much effort people make to cut their carbon footprint and in which direction they make that effort. That is a further attractive characteristic that is not possessed so directly by carbon taxes. Of course, there are some downsides to personal carbon trading, and I am sure that we will hear more about those from the Minister. The Government’s response is peppered with them, and I shall deal with them presently.

The scheme is potentially very complicated, which makes it hard to understand, particularly for people who are not used to the concept of financial trading. There is a danger that unless the scheme is very sensitively introduced and formulated, it could be somewhat arbitrary and even unfair in its impact.

The Committee’s report sets out why we believe that personal carbon trading is both an excellent way to raise the profile of climate change and related issues and a powerful incentive for individuals to make low-carbon choices in their daily lives. Against the background of an increasingly urgent and grave threat from climate change, our report concluded that more radical measures are needed if individuals and households are to contribute meaningfully to the meeting of UK emission reduction targets. Without their contribution, Britain will struggle to reach those targets.

The Committee judged that personal carbon trading has the potential to be more engaging, effective and progressive than most green taxes. I mentioned the point about the impact being progressive rather than regressive, but personal carbon trading also offers a real benefit to individuals and families who earn modest incomes, live in average-size homes, do not have air conditioning or heated swimming pools, and who are prepared to wear a sweater in the winter rather than just turning up the heating. Such people could receive a cash benefit if the system was properly designed.

Personal carbon trading can make a big contribution by helping Britain to cut its emissions. However, I accept that the system is complex and difficult to understand. For that reason, the mere existence of a
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wider public debate is in itself quite useful, enabling people to talk and think about it more, so that gradually they may come to understand it more clearly and easily. I assume that the principles of carbon trading are understood by everyone present and I think that they will be understood by most people who take the trouble to read the report of this debate, so, I will not weary hon. Members with a great detailed account of how personal carbon trading works. We explored that in the evidence we took and in the report itself.

What I want to do instead is depart slightly from the recommendations of the Committee by making a plea for a pilot scheme. We were somewhat cautious in our assessment of the merits of such a scheme. In the year since we published the report, I have concluded that we will never win the argument just on some abstract, intellectual basis. We have to have some practical evidence of how a scheme will work if we are to win more support for it. My proposal is for a pilot that is quite limited in scope. Its results could be analysed and tested for the fairness and effectiveness criteria, which are very important. That is the only way we will overcome the objections that are raised when personal carbon trading is advocated. I have to say that, regrettably, the opponents appear to include the authors of the Government’s response.

To minimise resistance and objections further, the pilot could be carried out on a virtual basis. It does not even require any cash to change hands—cash trading or transactions do not have to be involved at all. A virtual pilot would have nearly all the merits of an actual pilot. Let us suppose that the scope of the pilot was confined solely to the emissions from the energy consumed in individual households for heating, lighting, cooking, cooling and so on. That would be quite simple to measure, because such energy is almost entirely derived from electricity, gas, oil and coal supplied directly to houses.

Let us further propose that the pilot took place in a very limited geographical area. I would like to volunteer for this purpose the Babergh district council area in my constituency. There are 83,000 residents in the district, just under 70,000 of whom are voters. I am glad to say that at each of the last six elections, they have returned a Conservative—me. There are just under 35,000 households, so the area is large enough to offer a meaningful reflection of what might happen if the scheme were introduced nationally, but small enough to operate an experiment very cheaply. The results of an experiment of that size could be analysed accurately, and we could gain very important data as a result.

Such an experiment would establish much more clearly than any theoretical argument whether the objections to personal carbon trading are valid. It would also establish whether the advantages are what supporters of personal carbon trading like me claim. I am quite willing to be judged on the evidence. Even in their response, the Government acknowledged that they would welcome more research—they did not show much enthusiasm for commissioning or even encouraging it, but they said that they would welcome the results. I believe that the concept would stand the test and that the experiment would show that the benefits that we
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claim would be borne out in practice. If we go down that route, it would be possible to overcome some of the more alarmist objections.

To get the pilot scheme going, I suggest that we measure the actual emissions in the households that form the experimental area. That would give us valuable base data, and total emissions in the area could then be averaged out. Individual allowances would be broadly equal, but some would have to be adjusted: there would be weightings for age, and disability, and perhaps weightings based on the kind of home in which those individuals live. We could experiment with the details. If the pilot was for a limited period—say three years—year one could have a cap at the existing level of emissions, so there would be no attempt to impose an immediate cut in emissions, and years two and three could have progressive, tapering cuts, so we could achieve a guaranteed reduction in the emissions from the households in the Babergh district.

If the scheme were sponsored by a private sector sponsor—I am sure it is possible to find one—we might find that there is no cost to the central or local taxpayer. The cost of establishing an electronic trading exchange for such a limited number of people would be quite modest, given the low cost of most IT schemes now. Every individual participating in the scheme would know the amount of their allocation before the start of the experiment, and the total for the district would also be known. Each individual, however, even if the district had an allocation that was the equivalent of existing emissions, would have an incentive to start reducing their own footprint straight away to make the cash gain or virtual cash gain that would be available to them. It would therefore engage the interest and attention of a great many people, particularly younger people and those who are keen on using the internet. There could be rewards for people who take part in the experiment. It might be difficult to entice some people into the scheme, but others could be given an incentive, whether financial or otherwise.

Such a pilot scheme would be fair—it would not be threatening to people who found it hard to understand—and interesting for people who want to take part. A further advantage would be that the operation of the scheme could be monitored externally as we go along. The awareness of climate change among the participants—even the reluctant ones—could be measured and there could be data on advances during the scheme and afterwards. In the same way, the extent to which the scheme achieves behavioural change could be measured. We could establish whether and how the participants began to cut their own emissions in the period.

Similarly, the financial impact of the scheme could be measured. Would the scheme be progressive in the way that I claim? I believe that it would, but we could monitor that and show whether and how people made money; who made money; and why they did the things that made them money. It would also, of course, show who were the losers. We could monitor the understanding of the scheme. We could test in advance how hard people found it to understand and whether its progressive introduction gave people a better understanding —we could learn whether people comprehended what was happening more clearly as the pilot progressed. As the cap tightened, it would bepossible to show whether
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the emissions from the district were being reduced. No form or level of carbon tax can guarantee that outcome, as I said.

The merits of such a pilot are considerable. We set out in our report three criteria for overcoming opposition to personal carbon trading. We judged that to overcome that opposition, the public must first be convinced that emissions have to be reduced. I hope the scientific evidence is gradually helping to achieve that aim, but we may be able to do other things to convince people. Secondly, the public must be convinced that individuals must take some responsibility for cutting their emissions. A pilot scheme of the sort that I advocate would remind everyone that they have the opportunity to take that responsibility if they wish to do so, and many people respond well when they are given such an opportunity. Thirdly, we judged that the public have to be convinced that personal carbon trading is fairer and more effective than raising taxes. I believe that the effectiveness of personal carbon trading is clear, because specific emissions cuts could be guaranteed, but its fairness needs to be proved, which is the purpose of the pilot.

The pilot scheme would also allow us to observe movements in price. There have been concerns that the price might spike or slump, which would make the scheme harder to operate and upset the participants. The pilot would allow us to judge whether that would happen. A pilot that involves 83,000 people is big enough to provide convincing data in that regard. There could be other problems. Would the cap need to be increased in the event of an extremely cold winter? There could be a pre-determined formula for that. If the temperatures were substantially below the norm for a certain time of year, additional allowances could be fed into the market. That may sound complex, but with modern technology, it does not need to be. In any case, the purpose of the experiment is to try to iron out such difficulties.

We acknowledge in our report that smart metering is very important and that it can play a big part in helping people to understand how such a scheme would work, and enable individuals and households to track their performance. The pilot would also tell us whether it is possible to engage the interest, understanding and participation of those people in the community who are normally financially excluded—households who do not participate in normal financial mechanisms. I believe that anyone who uses a supermarket loyalty card would have no difficulty grasping how to engage in personal carbon trading, but the proposed experiment would enable us to judge that. I am not suggesting that this is the only way forward. It is one way, but other forms of experiment could be conducted, perhaps even simultaneously in different parts of the country. However, I am certain that simply arguing in the abstract about personal carbon trading is not going to take us very much further.

Let me turn to the Government’s response to our report. I am normally very generous in my comments on Government responses, never more so than when we are coming up to an election, because I am a passionate believer in a bipartisan approach to dealing with climate change. However, I was disappointed with this document. It suggested that the minds of the authors—I am sure that the Minister had nothing to do with writing it—and the minds of some of the civil servants, with whom the Committee had some private exchanges later in the
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year, are not as open as they should be. That was particularly disappointing, because the former Environment, Food and Rural Affairs Secretary, the right hon. Member for South Shields (David Miliband), who had responsibility for such things before the Department of Energy and Climate Change was created, was quite enthusiastic, at least in his intellectual engagement with the subject. Now caution seems to prevail—caution to the point of hostility and even defeatism—in the face of the arguments.

The Government’s response acknowledges that home energy use accounts for a substantial part of Britain’s carbon emissions. It is apparent that despite some commendable initiatives, the scope for more energy efficiency, behavioural change and so on to cut emissions remains considerable and largely untapped. It seems likely to me that the potential for big step changes in the energy efficiency that households want to achieve will be realised only if we introduce much more radical measures to incentivise it.

The Government’s response also claims that public support for personal carbon trading is “limited”, but that has been the case with all sorts of desirable changes that have taken place. Ten years ago, public support for banning smoking in public houses would have been limited. That does not mean that it was the wrong thing to do; it was an opportunity for leadership. Going back further, before seat belts in cars were compulsory—I am probably the only person present who is old enough to remember that—support for that measure was decidedly limited in the 1950s, just as support was fairly limited for the breathalyser. All those changes needed leadership from the Government. To run away from an idea because support for it is limited seems an unsatisfactory justification.

The response says that there is

That is hardly surprising, as they have absolutely no opportunity to trade at the moment. How could there be evidence of large numbers of people wanting to trade, as there is no chance to do so and understanding of the issue is limited in the absence of any scheme under way?

The response says that

I am confident that an experiment with only 83,000 people—they would participate and trade—would be large enough to make an active market. The response also mutters about foreign visitors, but that would not be an issue for a pilot scheme along the lines that I have proposed.

The response alleges that personal carbon trading

I invite the Minister to agree that that statement is simply ridiculous. It is not a tax, because there is no compulsion to pay it. It can be avoided totally, it raises no revenue and it offers the prospect of a cash reward. None of those things could be described as the characteristics of an expensive or complicated form of tax.

The response states:

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Again, that is a pretty silly allegation. Unlike a tax, it could guarantee energy-saving behaviours. It would remind everyone of the advantages of energy-saving behaviour every time they switched on a light in their home. The response goes on to say that:

A pilot scheme along the lines that I have proposed would gather exactly that evidence.

The response refers to the “significant costs” of a scheme, suggesting that it would cost £2 billion to set up and £2 billion a year to run. Those are figures plucked out of the air, without any reference to the type of scheme that might be introduced. It is a frankly nonsensical objection that does the Government little credit.

The response refers to recommendation 4 of the report and seems to assume that individuals would have a nil allocation of allowances. It is not clear, but that appears to be the assumption at the top of page 6. I have argued strongly for the EU emissions trading scheme to move as fast as possible to 100 per cent. auctioning, but I do not envisage at all a system of personal carbon trading involving any kind of auctioning. Free allocations would be given, just as people receive a free income tax allowance. It would be quite possible for people to live within the scheme without having to buy allowances at all. If they stayed at or below their free allowances, they would not be involved in buying allowances. They would, of course, have something that they could sell if they wanted to, but they would not be forced to go out and make purchases.

The response says:

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