Memorandum by Sir Ian Byatt
I am a Senior Associate with Frontier Economics
and an Honorary Professor at Birmingham University. I was previously
Director General of Water Services (Ofwat) and, before that, Deputy
Chief Economic Adviser to the Treasury, where I was responsible
for leading micro-economic/supply side analysis within the Government
Economic Service. I had worked in the Department of the Environment
in the early 1970s on the Club of Rome predictions. I welcome
the opportunity to briefly elaborate the views set out in the
letter published in the Times on 24 October 2004.
That letter argues that, in this area, government
and opposition are now of one mind. Both hold an alarmist view
of the world, and call for a radicaland costlyprogramme
of action. Both seem to believe that prospective climate change,
arising from human activity, poses a grave and imminent threat
to the world. Such statements go well beyond what can be taken
as established facts.
My own reading of the evidence is that many
of the scientific issues surrounding climate change remains unsettled.
More importantly, in my view, there are a number of economic issues
that have not been adequately addressed. It is premature to conclude
that any human-induced global warming would necessarily occur
rapidly and further, that any such warming would be catastrophic.
I do not, therefore, agree that drastic and far reaching action
is justified, especially without more careful consideration of
the type of action appropriate, and of the costs associated with
The actions favoured by ministers appear chiefly
to take the form of a range of higher targeted subsidies, and
of stricter controls and regulations to limit CO2 and other greenhouse
gas emissions. All of these measures would raise costs, for enterprises,
for households, for taxpayers. They would make many people, including
some of the poorest, significantly and increasingly worse off.
These actions should be challenged on four grounds:
The underlying analysis begins with
projections of emissions that are subject to much greater challenge
than is generally recognised;
They neglect the power of market
They involve a flawed approach to
decision taking; and
They underestimate the costs of the
I turn briefly to each of these points and conclude
by arguing, based on my own experience, of the importance of ensuring
proper use of economists in the Government Economic Service in
The Future and the IPCC Process
Temperatures have risen in recent years. There
is insufficient evidence, however, that this represents a lasting
change in long-term trends, or that human activities are solely
or primarily responsible for these changes, or that single remedies,
such as radical cutting of carbon emissions, will reverse them.
The history of our climate shows significant,
yet imperfectly understood, changes in the past. The treatment
of economic growth in the IPCC scenarios is flawed. Changes will
take place in basic parameters. For example, the energy intensity
of economic growth has changed significantly as energy prices
have changed. (In his evidence to your lordships, Professor McKitrick
has pointed out that global emissions per capita have levelled
off since around 1975.)
Other market responses will influence outcomes.
There are offsetting effects. For example, discharge of CO2 increases
biomass as well as carbon in the atmosphere. The trade-offs involved
in these issues should be more closely studied.
Modelling has its uses in trying to understand
the future. But it also has its dangers and its track record in
making predictions, even within a range, is poor. The data used
in models is subject to error, complex models are difficult to
disentangle and different techniques of modelling produce different
answers. There is often some particular parameter in a complex
situation that dominates the answer. My own experience of understanding
the Club of Rome projections in the 1970s and of forecasting the
price of oil in the 1980s convinced me of the dangers of relying
too heavily on quantitative modelling in policy formulation. In
his evidence to your lordships, Professor McKitrick has argued
that the modelling procedures are flawed because of mistakes in
the underlying factor analysis.
Scenario planning can be valuable as a way of
linking uncertainty with analysis of possible actions. But to
be helpful, the scenarios must cover a wide range of possibilities
and, furthermore, some analysis of probabilities is essential.
The IPCC scenarios suffer from a limited range as well as from
limited analysis of the underlying economics.
More broadly, the handling of economic issues
within the IPCC process is open to question, and cannot be viewed
as professionally representative. I believe that Treasuries and
Ministries of Finance should pay more attention to this aspect
of the process, both nationally and internationally.
I conclude that there is neither sufficient
evidence to forecast the "hockey stick" changes emerging
from the IPCC work now set out in the Government's Paper on Energy
(DTI Our energy future: creating a low carbon economy.
Cm 5761. 2003), nor to justify the drastic action thought necessary.
The Role of the Market Economy
Where there is diversity in perceptions, preferences
and situations a market approach has major advantages over the
command and control approach of setting "scientifically determined
safe targets". This is particularly important where the implementation
of policies to meet such targets would involve drastic action
with limited chances of success and the potential for massive
waste of resources.
As Sir Alan Peacock has shown (The Political
Economy of Sustainable Development Presidential Address to
the David Hume Institute, 2 October 2003) markets take account
equally of human altruism and human selfishness. They provide
highly sophisticated ways of doing this. In contrast, command
and control policies typically fail to achieve their objectives
in a cost-effective way. They cannot take proper account of the
mass of relevant information. Their use risks making mistakes,
often on a massive scale. Notable examples are government support
for aviation and nuclear power. A more recent example is provided
by the government's response to foot and mouth disease, where
large numbers of farm animals were slaughtered with little consideration
It does not follow, of course, that market mechanisms
are always sufficient fully to meet social or collective objectives.
Some governmental intervention may be needed fully to secure collective
objectives. But rather than adopting policies that impose their
view of collective objectives, governments can help markets to
work better by creating incentives to more socially acceptable/less
environmentally damaging behaviour. This use of incentives is
particularly effective when there are differences in situations,
endowments and preferences. They are also much more transparent.
Market mechanisms can be particularly effective
in an uncertain world. Government planning is inevitably based
on imperfect knowledge. As new facts emerge and perceptions change,
governmental planning easily becomes stranded in wrong solutions.
In contrast economic agents have demonstrated a remarkable ability
to adapt to change and to respond to market signals. As Professor
Anderson has argued in his evidence, there is a wide range of
ways of reducing CO2 and other greenhouse gas emissions. The use
of market signals would help to explore which are the more acceptable
and cost effective ways of doing this.
The use of market mechanisms also provides a
running check on the costs of policies. Initial estimates of costs
can be built into a policy instrument, such as a carbon or greenhouse
gas tax. Should that instrument prove to be less effective than
had been originally estimated, i.e. more costly,because,
for example, costs of compliance have been underestimatedfurther
consideration of the costs and benefits of the policy are prompted.
By contrast slow progress or apparent failure of command and control
policies tends to prompt intensification of the policy simply
because the immediate objective is not being achieved sufficiently
Human beingsin diverse positions with
differing objectivesrespond to circumstances in different
ways. Situations where there are multiple actors and multiple
objectives are not best characterised as situations where there
are specific problems to be solved. It is not helpful to approach
them as one where "we", the human race, led by a benevolent
leader, or advised by a Platonic guardian, must rely collective
action to secure a single objective. Rather than targeting "safe
scientific" standards, whatever the costs of doing so or
the benefits of achieving them, it is more useful to ask how economic
agents with different capabilities can be expectedor encouragedto
adjust their behaviour.
The use of the precautionary principle is frequently
used to justify action where severe damage is in prospect, albeit
with a low probability. This can involve a flawed approach to
decision taking. To be prudent may be wise, but the rule must
be applied systematically. There may be risks that global warming
is taking place, but there are also risks that policies designed
to counter this will damage the achievement of other objectives.
For example, world economic growth is the only sure way sustainably
to reduce world poverty. And economic growth leads to reductions
in the energy intensity of GDP. The precautionary principle should
be applied in a comprehensive way, taking a balanced approach
to all the risks, and not simply to some of them.
Dealing with uncertainty is essential, yet the
state of analytic techniques is still limited. To do the job properly
must involve a large element of judgement. It is not enough to
combine unsatisfactory scenarios with over reliance on one decision
rule, especially when it is applied selectively.
The Costs and Benefits of Policy
In my experience, the costs of government actions
are usually underestimated by government ministersoften
by a large margin. This was my regular experience both in the
Treasury and in the regulation of the water industry. There is
already evidence of substantial underestimation of the costs of
"green" electricity. (David Simpson Tilting at
Windmills: the Economics of Wind Power Hume Occasional Paper
No. 65 April 2004)
In my experience as a government advisor and
at Ofwat, the benefits of environmental policies are rarely analysed
carefully or systematically. Difficulties in assessing benefits
are avoided by simply asserted that they always outweigh the costsor
"that there is no choice". In this case we are told
to "save the planet" with little idea what this involves
other than a slogan for virtuous action.
In reading the uncorrected evidence of DEFRA
officials, I was struck by the lack of evidence of damage/benefit
functions in this area and the lateness of attempts to fill this
gap. Despite the difficulties of such work, it cannot be right
to base far-reaching policies on this foundation.
Furthermore, there are always opportunity costs
to be considered. Many more policies are said to be essential
than there are resources to implement them. It is necessary to
consider the alternative use of the resources used as well as
the financial costs of proposed actions. This rarely happens in
Conventional wisdom alleges that the civil service
is too concerned with "policy" and too little with "delivery".
There may be some truth in this, but the view that civil servants
are employed simply to implement strategy and to take no part
in its formulation risks creating situations where action, and
not always well judged action, is taken without adequate consideration
of all the consequences, including the unintended consequences.
Recent years have seen the growth of powerful
single interest pressure groups, the NGOs. They often have charitable
status and are well financed and well staffed. They have become
political bodies, with considerable lobbying power, although their
accountability is to their members, not to a democratic constituency.
They are usually interested in furthering specific objectives,
not considering the trade-offs involved in policy choices. That
role must fall to democratically accountable government, which
needs adequate resources to discharge this responsibility. These
resources do not all need to be within government, but there must
be sufficient internal capability to ensure that proper analysis
is carried out and properly presented to ministers. External checks
may be necessary to ensure that this is taking place.
The Role of Government Economists
The presence of professional economists inside
the government is a crucial aspect of such a capability. It can
help to reduce the risk of hasty and ill-considered action. It
can also guide action in ways that will help to ensure that policies
have been subject to rigorous economic analysis. The government
has recognised the importance of economists by expanding the Government
Economic Service (GES), which now comprises some 800 trained economists.
But are they being well used in this area of
policy? There is no evidence that they are having a powerful influence
on decision taking in this area. Yet substantial resources, including
public money, are at stake. Baroness Farrington told your Lordships
on 21 April 2004 that the government was satisfied that the economic
and statistical work of the IPCC is the most comprehensive assessment
available. If it is the best available, it is only because economic
experts have not been properly deployed, either by HMG or other
governments. My own perception is that the economic issues are
being avoided and that Baroness Farrington's later assertion that
"the views expressed by Mr Castles and Mr Henderson were
considered extremely carefully by the government" reveals
economy in drafting rather than economics in policy.
I urge your Lordships to examine the role of
the GES in consideration of these issues, both in Whitehall and
in guiding the work of the IPCC.
I am concerned that:
The UK Government is pursuing polices
to combat climate change that are a less than fully considered
response to a situation that is much more uncertain than acknowledged;
The economic analysis underlying
governmental decisions is at best inadequate and in some respects
29 March 2005