Memorandum submitted by Keith Buchan
CLIMATE CHANGE,
EMPLOYMENT AND
THE UK RECOVERY
Introduction
While the credit crunch and the recession have
drawn attention away from climate change, there are very important
reasons why addressing the problems of the UK economy and its
carbon emissions must be done together. In fact, the stability
of any recovery will depend on the achievement of climate change
goals.
This is because the UK has been suffering from
a severe deficit in its balance of payments, and fuel imports
are a major part. The UK ceased to be a net exporter of oil in
2004/5 and thus reducing carbon emissions will directly reduce
imports. The final challenge in the new economic context is to
lower emissions in ways which support and create employment (rather
than general consumer spending) as quickly as possible.
How much are carbon reductions worth to the balance
of payments?
The UK is experiencing a period of high deficits
on its balance payments. This is explored in a little more detail
below. In 2007 this amounted to about £39 billion, of which
£7.1 billion was the net fuel deficit (of which £3.9
billion was oil based).
The UK's Digest of UK Energy Statistics (DUKES)
2008 shows energy consumption was 164.6 million tonnes of oil
equivalent (mtoe) in 2007. Transport consumed about 60mtoe, of
which 12mtoe was aviation and 41mtoe was directly road related.
Domestic users were responsible for about 44mtoe.
Total energy expenditure is much more dominated
by transport, reflecting the higher price of oil based energy.
Thus road transport takes 49.1% of total expenditure, domestic
users 23.4% and industrial users 12.2%.
From this, it is possible to consider how achieving
the carbon reduction targets adopted for the UK would reduce the
balance of payments and how quickly two major sectors where there
are known methods of reduction, transport and buildings, could
make a contribution.
Calculating the numbers for this is difficult
because of fluctuations in oil prices and the exchange rate. However,
it is possible to estimate the balance of payments impact of,
for example, each 1% reduction in petrol and diesel used by transport.
At $50 a barrel and $1.40 per £, this is
over £110million. Thus the climate change target of a 26%
reduction by 2020 is worth over £2.5billion at a low oil
price. If the world economy recovers, the oil price will rise
and at $100 a barrel the value would be £5billion. Achieving
such a target for domestic users would benefit the balance of
payments by around half this figure. It should be noted that any
over achievement represents a further benefit.
Which policies could achieve such a reduction?
For example, In transport, travel planning initiatives
which encourage car sharing, public transport, walking and cycling
could achieve fuel reductions of 10% for expenditure of a few
hundred million, rather than billions of pounds. These are known
techniques which are only waiting for Government funding. They
could start immediately and would create jobs in the "Smarter
Travel" industry.
Improving the energy efficiency of space and
water heating would cost a similar amount—there are about
10 million older boilers in UK homes that could be replaced with
models which are 40-50% more efficient. Solar heating can provide
most domestic hot water in the summer and up to a third in winter.
Existing grants are small and the total is limited. New grants
would boost this and at least a billion a year should be used
in a nationwide programme. This would have a rapid positive effect
on jobs in the building industry, where the recession has caused
deep cuts.
Why is this important for any UK recovery?
The answer to this question can be found in
the Treasury's Pink Book which deals with the UK balance of payments.
The Office of National Statistics publishes a large quantity of
data using different assumptions about prices, for example current,
constant and chained. While the exact total values are different
for each set of assumptions, the pattern is very similar.
Prior to 1997 there had been two major consumer
led growth events named after Chancellors of the Exchequer: Antony
Barber in the mid 1970s and Nigel Lawson in the late 1980s. In
both cases, an increase in consumption caused an increase in imports
and thus a balance of payments deficit. Amongst other effects,
this puts downward pressure on the pound and in these circumstances
devaluation is a corrective mechanism—it puts the UK price
of imports up and the external price of exports down.
What is interesting is that from 1998 until
2007 there was a significant balance of payments deficit but with
very little impact on exchange rates. There are several factors
which may have enabled the consumer led expansion to last so long.
The first is that the UK exported more oil than
it consumed—this helped the balance of payments but the
pound was also seen as a petrocurrency and may have held its value
for that reason. In addition, interest rates were higher in the
UK than in the Eurozone—tending to attract footloose deposits
and adding to the currency's strength. Finally, the new forms
of access to the wholesale money markets through elaborate financial
products allowed short term money to flow into the UK economy.
The current UK recession will mean a reduction
in imports, but the world recession will mean that exports will
also fall. Earnings from services and foreign investments, which
have in the past brought surpluses to the UK balance of payments,
will be hit by the recession and by the unknown value of some
of the assets.
This means that sustaining growth in a context
of paying back Government debt and a balance of payments deficit
would be extremely difficult. The extent of the balance of payments
problem is illustrated in the charts on the following page.
For this reason, a renewed emphasis on the "UK
plc" profitability, measured through the balance of payments,
will be essential in terms of a stable currency and international
confidence. On the latter, there is a major difference in perception,
as well as in fact, between investing with a tangible return and
supporting consumer spending. This will influence the ability
of the UK Government to borrow in the international markets. In
transport, demand can be managed at relatively low cost and investments
which are predicated on continuing high levels of transport fuel
use should be avoided. This particularly applies to road travel
and aviation.
Source: ONS dataset IKBJ
and IKBM.
It should be noted that the above does not include
some financial transactions which complete the UK national accounts.
These involve income and expenditure on investments and other
foreign assets and liabilities which have expanded greatly in
recent years. There is clearly some degree of uncertainty over
the latter.
27 January 2009
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