Select Committee on Economic Affairs Written Evidence

Memorandum by BP


  1.  Economic aspects of climate change are as important and as contentious as the scientific dimensions. Even if the science of climate change were perfectly understood, economic aspects would be critical in the assessment and comparison of policy options and their timing. The economic aspects will always be complex. The overlay of scientific uncertainty multiplies this complexity.

  2.  Nevertheless, despite these difficulties it is still important that economic assessments of climate change and mitigation policies be undertaken in order to assist in the determination of most suitable policy options.


  3.  BP believes that policy should be predicated on the scientific consensus having established the need for precautionary action. There is a broad consensus of scientists that believe that the world is warming and that human activity, including the burning of fossil fuels, has been a causal factor in most of the recent temperature changes.

  4.  While acknowledging the very large degree of uncertainties within the science, BP believes it is reasonable and prudent to assume that a continuation of current energy trends will raise global greenhouse gas concentrations, and that these in turn will exacerbate global warming. This could manifest itself in various ways, such as further increases in temperature, a rise in sea level and an increase in climatic instability. We have stated publicly that we feel that it is time to begin to take action in face of these very long term problems.


  5.  Acceptance of this precautionary approach demands an economic response. Economic analysis of the problem has tended so far to focus on cost-benefit analysis. The work undertaken in the 1990s often focused on the physical mechanisms of climate change and potential damage it might cause. More recently, and especially in the economic work involved in the production of the IPCC's Third Assessment Report (TAR) in 2001, this has been extended to include the costs of mitigation over very long periods of time. However, one should emphasise that underlining all this is the reality that attempts to assess the costs and benefits associated with changes in the energy mix are likely to meet with a greater degree of accuracy than estimates covering the totality of costs as a consequence of changes in the climate.

  6.  Ancillary costs and benefits will also inevitably develop from climate change mitigation policies. But the temptation to address more than one issue with a single policy instrument should be resisted.

  7.  This is because it is very easy to exaggerate the "double dividend" which is sometimes claimed from a single instrument. For example, there can of course be ancillary effects of imposing a tax, in addition to its main purpose, and these must be taken into account. But in general, policies should aim at redistributing such revenues in a tax neutral manner. It is better to use single instruments for single objectives.

  8.  Finally, the understandable urge to be seen to be "doing something" must be resisted if the resultant costs outweigh the benefits, or possibly undermine the long-term economic strength which will be required to develop new technologies and invest in mitigation programmes.


  9.  BP considers that the work of the IPCC Working Group (II) was very valuable. Most importantly it indicated:

    —  There is a massive range of uncertainties with respect to macroeconomic and energy prospects over a century. The fundamental differences between the range of credible scenarios is striking.

    —  There are a range of technologies that exist today that could, over a long period of time, effect a global transition towards a sustainable level of greenhouse gas emissions and a sustainable global climate.

    —  The costs of these today and in the future are very unclear. Nevertheless, sets of apparently reasonable assumptions can lead to the conclusion that the long term costs of emission abatement need not be high.

  10.  The choice of policy instruments in implementing mitigation strategies is critical. The economic benefits of global emissions trading is clearly high.

  11.  Nevertheless, all such economic analysis faces a set of fundamental problems:

    —  The economic objectives may conflict from time to time. For example, in some instances lowest cost outcomes could conflict with sustainability and equity objectives, where they do not fully represent the cost of important externalities, eg local air quality. There will be a need to compare winners and losers.

    —  Conclusions can be very sensitive to discount rates. The intergenerational dimension of the climate problem makes the issue more complex, while indicating a possible rationale for use of discounts rates that are lower than market rates.

  12.  Further economic analysis will be needed continually at the national, regional and global level as scientific knowledge increases, lessons are learned from policy implementation, technologies advance and costs change. To date there is no reason to believe that economic research has been inadequate as the world has struggled to understand the issue of global warming and policy options. First class UK economists have been involved in the work of the IPCC and in independent studies.

  13.  BP believes that at this stage it is impossible to define with any meaningful accuracy who will bear the costs of future climate change and of possible resulting mitigation policies. Specific cases can be identified with some degree of certainty (eg very low lying island communities) but other dimensions are too uncertain. This is especially so of the regional dimension, where it is virtually impossible to analyse or predict specific risks on a country-to-country basis. It is even unclear, for example, whether the UK would become warmer or colder as and when the world warms further.


  14.  In broad terms BP believes that there is no single technology or instrument that will "solve" climate change. Market based policy options tend to be most likely to deliver lowest cost options. However, each major policy option requires a cost benefit analysis.

  15.  Trading of emission permits has shown itself to be a valuable tool. The value is greater to the degree that trading is permitted across national boundaries.

  16.  Continuing scientific and economic research is required to better understand the problem and mitigation options. Knowledge sharing needs to remain a key element of climate policies.

23 March 2005

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