Select Committee on Economic Affairs Minutes of Evidence

Examination of Witnesses (Questions 365-378)

Mr Adair Turner

15 MARCH 2005

  Q365Chairman: Mr Turner, you are very welcome. You have no doubt done these things many times before. We are delighted that you are able to come along and help us with our inquiry. We have a number of questions. Would you like to say something at the beginning?

  Mr Turner: No, I do not think so. We can deal with this in questions.

  Q366Chairman: I wondered if you would like to give us some idea of how you see the threat of climate change, especially for the business community. Is it your view that it will affect industry directly, for instance through flood risks, or is the main concern the burden of additional costs that will flow from it?

  Mr Turner: People in business who look on this responsibly fundamentally believe that there is a global problem that needs to be responded to and needs to be responded to in as cost-efficient a fashion as possible. The starting point of business is probably neither that there is a set of opportunities nor that climate change itself would directly influence a particular business. Let us be clear, most businesses do not think in 50-year terms in relation to their individual business, or in very long-term terms. Business on the whole wants to have a responsible attitude and recognises that this could be a major problem for the world with economic and social consequences for the world, and therefore wants to be able to respond to it directly and to play its role in it. There are specific businesses which have a more direct interest in it. As you will be aware, that is fundamentally the insurance and reinsurance industry, which does have a direct interest in the costs which may be coming from either flooding in the UK or an increase in hurricanes and extreme events round the world, if those are linked to climate change. We do not fully know that at the moment but they may be linked. I think the real distinction, in terms of business, is, on the one hand, a group in business who recognise a global, economic and social problem that needs to be responded to but whose concern is how you do that in as cost-efficient a fashion as possible, and then specific bits of business which have an interest in the insurance and reinsurance costs fundamental to that particular industry.

  Q367Chairman: We have had all sorts of evidence from all sorts of people. If I may say so, one of the things that is interesting is how different the effects of global warming will be in different parts of the world—and indeed there are arguments that in some parts of the world it will actually be of benefit rather than a disadvantage—and how variable are some of the forecasts as to exactly what will happen. What would your view be of the forecasts? Are you pretty confident?

  Mr Turner: The answer is that we do not know the precise effects of climate change on the weather in particular regions, and most climate change scientists would tell you that, but I do not think that should be treated as a basis for inaction. Let us work out what we do know. We do know that throughout at least the last 500,000 years or so carbon concentrations in the atmosphere probably oscillated somewhere in the 200 to 280 parts per million (ppm) level. We know that at the beginning of the industrial revolution we were probably at the top end of that 500,000 year historical oscillation and that we were at the top end of the temperature of that historical oscillation. We know that we are on a path where, even if we now do things, that concentration level is extremely likely to go to 500 ppm, ie we will be at least doubling or thereabouts the level of concentration of CO2 in the atmosphere. We know that that CO2 plays a fundamental role in the climate. Basically, if there was not CO2, we would be as cold as Mars or somewhere like that, and we would not have human life. At the very least, there is this vital chemical in our environment and we are on a path at least to double the quantities of that in a way which is likely to have very major effects on the climate, and we do not know what those will be. We can then have models which try to work out, as best as possible, what those will be. It is highly likely that some of those effects will be harmful. It is at least possible that in some parts of the world you might say they would be positive. It is a hugely dangerous thing to set about such a change just hoping that the benefits will outweigh the disbenefits, or hoping that your particular country is going to be at the OK end. The other thing I would say about climate change, and you have to think about this in economic terms, is that human beings have populated the world in locations and with building styles and with infrastructures which are suited to the present climate. If you change the climate, even if in some places it happens to be colder and in some places it happens to be warmer, you must be imposing huge economic costs of adjustment to a new climate situation. Even if you thought that the net effect would be no warming on average, you should be very wary of producing major changes. Having said that, the balanced view is that the world is warming up. It may warm up very significantly beyond certain potential tipping points, and we do not know where those are. There is at least a possibility that when you go beyond, say, 2º or 3º above pre-industrial levels, you will get to a point where there are certain reinforcing cycles within the climate change, which could then take it fairly quickly to 4º or 5º. The best estimates of the scientists are that these changes are going to have seriously harmful effects. I think it is possible that those effects might be most harmful for people who are not here in Britain. It might be that they are most harmful in Africa through lower rainfall; in China by the melting of the Himalayan glaciers and the change in the water flow through the river systems. So you could attempt to have a completely selfish attitude to this and say, "I have worked out from the models that I am going to be OK and the rest of the world has a problem". But that would be a dangerous thing to do even for one individual country, and certainly it would be a completely irresponsible thing to do in terms of what is a shared global climate.

  Q368Lord Elder: One of the things that slightly surprised some of us in the evidence so far is that we have really not heard very much about Kyoto. Could I just raise one issue with you? The Government's targets from Kyoto and also self-imposed targets will imply a substantial degree of decarbonisation of the economy. Do you believe that this is realistic, that it can be done, and do you believe, most importantly, that the costs of such decarbonisation would be acceptable?

  Mr Turner: Obviously, if you believe that climate change is a long-term problem, and I am convinced that the overall balance of scientific evidence is clearly that it is, and, if anything, that evidence has become more convincing and more concerning over the last three years, then by definition the only thing we can do over time is to decarbonise. Eventually, one has to decarbonise by a very significant amount. One would have to cut the level of CO2 emissions per capita, by 60, 70 or 80 per cent below the levels which now exist in developed, rich countries, which is, after all, what the Royal Commission on Environmental Pollution said in its report several years ago. The good news is that we do not need to do that immediately. We need to do that steadily over a 50, 60 or 70 year period, but we need to start on that process. The issue then becomes: what are the costs of both the first step on that process, which is a Kyoto-like target, and of what needs to be achieved in the long term. I have become completely convinced that these are utterly manageable costs. I think we are in danger of spreading an unnecessary despondency. Indeed, this debate is confused by two groups who, oddly, come from either end of the spectrum. There is, I think, a recalcitrant wing and an irresponsible wing of business, which says that the costs are so high that decarbonisation would do terrible things to competitiveness, for prosperity, because they just do not want to do anything. There is also a sort of radical part of the green lobby which also says that the only way to solve this problem is through rejecting the whole of material economic growth and changing the whole model of our society. Both of these seem to be completely nonsensical propositions when you actually look at the facts. If you just go through some very simple analyses, which I did in my book (I believe a copy of the chapter was circulated to you but the same type of analysis was also set out in the DTI document Options for a Low Carbon Economy and by many other people) you can work out how much we spend today on energy, how much we will likely spend on energy in 2050 with the natural improvements in energy efficiency which are occurring in any case, and how much extra we would have to spend if we had to buy it in renewable form and not a fossil fuel form. And it is obvious that the impact on the GDP in 2050 at the very worst that you could imagine would be, say, 2 per cent of GDP, but on a more reasonable set of scenarios it is more likely to be 0.3 or 0.5 per cent of GDP. That means that what is required to solve this problem is probably that rich developed countries will arrive in June 2050 at the prosperity level they would otherwise have reached in January 2050. In order to offset the major problems of climate change, this strikes me as really quite a trivial cost. You can make it sound a big cost if you measure it in pounds billion. All global problems and all global costs just end up very big in pounds billion or dollars billion but, expressed in the only way that makes sense, which is what reduction will this produce in the rate of growth of prosperity, I think we will hardly notice it, as long as we start soon enough. I think that is also true of the first step towards it. Kyoto, funnily enough, is criticised for two reasons: one, that it is not enough, and that is obviously the case. It is only intended as a first step along the path. The other is that it is overly-expensive. I do not think either of those is true. Again, if you run the same calculations for what hitting our Kyoto target for 2010 will do, it will produce an immaterial effect upon our rate of growth. That is because there does exist a range of technologies which, although more costly than fossil fuel technologies, are not so much more costly, and these technologies are getting cheaper relative to fossil fuels over time. I do think that, if you just run the numbers, one finds that these are completely manageable costs.

  Q369Lord Vallance of Tummel: May I take you a bit further on the management of costs? A number of witnesses have suggested to us that a straight carbon tax would be the sensible way to go. Figures have been put on that which vary between £50 per carbon tonne up to £100 per carbon tonne with the latter figure being what is necessary if the UK is going to hit in the long run a 60 per cent reduction in the target. How do you think industry would react to that if the Chancellor on Wednesday were to announce that?

  Mr Turner: If he were to announce on Wednesday that there was to be a £100 carbon tax, which on 150 million tonnes of carbon would be, if I am right, £10.5 billion tax, presumably they might be slightly upset, even if there were offsetting reductions, which one would assume there would be in a tax-neutral plan. On the other hand, I do not think that is how sensible policy has to proceed here. Those figures of £50 or £100 are based upon people's attempts to work out what it will cost us to remove the final margins of carbon to hit, say, the 60 or 70 per cent target by 2050. Obviously two things go on in those figures. One, at any one time and for any one technology, the more you have to cut, the more is the marginal costs of cutting, of switching from a fossil fuel to a renewable. Secondly, those figures may reduce over time if there is autonomous technological development which is producing technologies that reduce the cost of renewables. There is a balance going on there over time whereby it gets more and more expensive to cut the marginal bit of carbon for any one given technology, but the technology is changing. So people try to do these figures and they use long run models, and they may end up with figures that it might cost that at the margin to get the change required at the end of the story. That does not mean, however, that you have to set that as the tax right now. This again, goes to the role of Kyoto: I think we need a clear objective, and we have an objective that the UK will get to, say, a 60 per cent reduction by 2050. You need a set of intermediate steps which set you along that road. You need to begin to put some pressure through the pricing system, which is an immensely powerful system here. You can do that in two ways: one, by a carbon tax; and the other through the price established through an emissions trading scheme. On the whole, I think you want to generate the belief in industry that the direction of that tax or that price is more likely to be up than down. That in itself I think will begin to ensure that businesses make different decisions, both on energy efficiency and on the development of renewables. How do you progress over time from now to 2050? You can change over time. You may do it primarily by an emissions trading scheme and maybe by 2050 the price of carbon in the emissions trading schemes will be £50 or so, rather than the sort of

10 or so that most people are looking at at the moment. Even at

10 or

12 in the emissions trading scheme today, however, I think people who have analysed this believe that even at that price it will begin to produce changes in behaviour. One should not scare oneself silly by long-run forecasts of what might be required eventually in a technological environment that we do not know. The thing to do is to put in place a set of policy levers which begin to create the correct incentives for private industry and then iteratively to change those over time as we see what is occurring. It may be at the end of it we will have a very high price of carbon, established either through a tax system or an emissions trading system, though of course that would then be in an economy where only a small percentage of our energy use was coming from carbon. That would be an economy in which carbon was very high priced but only used in those places where there is no feasible renewable energy alternative. I think it is useful to do those figures. I do think that it would be better if our climate change level was more linked to carbon. It would be good if we created the expectation that that will gradually go up over time, but I do not think it is either necessary or at all feasible that we move immediately to what may, in 50 years' time, be the marginal cost of getting rid of the final increments of carbon that we have to get rid of.

  Q370Lord Vallance of Tummel: There is a long way between the market where the tax bites and the places where the major changes have to occur if we are going to produce new technologies for power generation and new forms of fuel. Is there no better way of inducing those at the far end of the business chain to put more investment and more effort in now on the assumption that they could make a lot of money downstream?

  Mr Turner: I do agree that we should have taxes on carbon use. I did say that we should establish the presumption that those are going up rather than down and that over time we have a greater degree of tax on carbon, whether it be in the electricity generation process or whether it be in transport. All that I am saying is that I do not think you need to know the end point precisely at this stage. You need to establish the belief that it is going to be on a gradual upward path. I agree with you that the tax mechanism or the emissions trading mechanism—because those are simply two alternative ways of establishing a price for carbon and a price for the difference between going a carbon-intensive route and a renewable route—should be part of the public policy tools, but we can move gradually in the direction that is required and iteratively change the likely end-point as we learn more about what is required.

  Q371Lord Vallance of Tummel: Is that sufficiently direct to make the CEO of, say, General Electric sit up and think: we ought to change our strategy in terms of power generation and we ought to be looking towards things that are CO2 neutral rather than going down our old routes? Those are the places where the inflections will come in.

  Mr Turner: That is obviously a good point. Some of the things that are already changing that are our renewables targets and the renewables obligations. One should not proceed with this on the basis that you have to choose between different instruments. I think you should be pursuing a number of different instruments simultaneously. We should probably increase and make more explicitly linked to carbon the tax element of policy, but we are already producing some reasonable shifts towards renewables through the measures that have been taken up already. The other thing I would like to say is this. The establishment of an agreed target in itself should provide incentives for the long-term development of technologies. Even if you do not yet know how you are going to get to a 60 per cent reduction by 2050, if there is an absolutely agreed aim of public policy, it is a reasonable inference for people doing long-term research and development that that must imply that there is going to be a set of measures put in place over time which will increase the value of having developed renewable and energy-efficiency alternatives. I think the target in itself is incredibly valuable, even if the instruments that we use to get there are things we are iteratively changing over time.

  Q372Lord Kingsdown: When you answered Lord Elder, I think you used the phrase that you thought that the costs of this would be manageable. Excuse the abbreviation but it was something like that. Witnesses to us have made it clear that in their view only a radical transformation of the way we use energy will put us on the path to climate stabilisation. If that is true—radical or, if you are right, manageable—who should pay for this transition: the taxpayer through public expenditure (I think you mentioned that) or industry and transport as the main emitters, the main offenders, dare I use that word? Where does the ordinary householder even fit into this?

  Mr Turner: I do think that is, in a sense, a false division. Taxpayers are ultimately households because households ultimately pay tax. If the costs fall on industry, they will ultimately fall on the products of industry. I think this idea that people can choose, "who will pay it but who will not pay it" is a bit of a false issue. The key thing to work out is: what will the costs, in terms of a lower level of GDP, be, if any? Those costs will arise if renewable energy is always more expensive than fossil fuels. There will be a cost but reasonable calculations show you that it is a small cost. The thing to do is to minimise that cost. In order to minimise that cost, you have then to think of all the sectors that actually use energy and make sure that you are applying appropriate incentives and policy tools for each of those. It is not that somebody is going to pay and somebody is not going to pay—the whole of society in some way is going to pay—it is that there are different levers which can impact on the different final use sectors. Industry actually is probably one area where it is somewhat easier to create levers than on either transport or household because industry, by definition, is run by managers whose job it is to maximise profit and who therefore respond pretty quickly to even quite small stimuli of tax systems or changes in cost, because that is their job. Therefore, I think that if we have a reasonably tight emissions trading scheme or the climate change levy even as it is at the moment, you will see significant improvements in the use of energy by industry. Indeed, that trend has been going on for some time. The more difficult sectors in some sense are the household sectors because households are not run by managers who sit there making scientific analyses of the cost of running the household. That is why you probably need there, possibly some more measures, including tax measures—and we can have debate whether VAT on fuel may have been a perfectly sensible thing, and I think it probably was—but whatever tax measures you use there, you probably need non-tax instruments as well. There is tremendously powerful potential in the household sector by making sure that, as we replace the housing stock, we relentlessly do it in a fuel-efficient process, both when we build new houses and when we change old houses. Regulation may have a significant role to play in the housing sector. I suspect in transport the way forward is both taxation and also regulation: regulation of engines will make a big difference there. Then of course we have the electricity generation sector where again a combination of different instruments is required: tax instruments, trading instruments and things like the renewables obligation. I do not think of it as who should pay. Ultimately individuals pay because everything else in a national economy is simply a pass-through. The question is instead what are the appropriate instruments which are most likely to produce a beneficial effect. Those probably do differ somewhat between the household sector, the transport sector, electricity generation and industry. We have some quite good understanding of what those different instruments are and those different elements of it.

  Q373Lord Lamont of Lerwick: Could I ask about the costs? I was originally going to ask just about where you thought perhaps the Government had not done enough to get over the scale of the costs, but you have made it clear that you think they are manageable and we should not, as you put it, scare ourselves silly. May I ask a couple of questions? The first is on a point of clarification. You said that in your view the cost might be as little as 0.3 or 0.5 per cent, whereas other people thought 2 per cent of GDP. I was not quite clear, in the way you expressed it, whether that was a cumulative figure which then reached a one-off effect or whether it was annual recurring. If it is annual recurring, of course, it is quite a considerable cost, especially if it turned out to be wrong and was in fact 2 per cent rather than 0.5 per cent. The main point I want to ask you is: looking at the cost-effectiveness of the measures, have you, in your mind, and have others, compared the cost-effectiveness of trying to act deliberately on the climate as it affects the whole globe as compared with measures that counter specific consequences of climate change, like trying to deal with rising sea levels, having sea defences, this sort of thing? You talked about the effects on individual countries or individual regions of the globe and said this would be very drastic; even if there was no overall change, there might be a particular effect on particular countries. That would surely happen over a long period of time in which there would be an adjustment process taking place. One thinks about architecture, ventilation of buildings and so on.

  Mr Turner: On the first point, I put that out as a hypothetical point. Even if you believe that the effect is neutral, there would still be costs. Let us be clear that the scientific evidence is not that it is neutral; the scientific evidence is clearly that it is warming. I believe that is now overwhelmingly clear and that we will undoubtedly end up warming the globe by at least 2 degrees on average above the pre-industrial level, even if we now took significant action. It will probably be higher, even if we try to take quite a lot of action. The more it is above about 2 degrees or so, the greater the danger that, due to some of the self-reinforcing effects which occur when snow melts and heat is absorbed into the earth and the potential release of methane strata, et cetera, there is a point at which, if you heat up 2.5 degrees, you are suddenly on a path to heating up 5 degrees. There may be some non-linear relationships within this. We are warming. It will vary by different countries. The question you ask is whether I or anybody else has done a complete analysis of the alternative costs of offsetting it versus managing round it by sea defences, et cetera. I think those calculating are extraordinarily difficult to do. I suspect that we would simply lose ourselves in not having the sheer computational power to make those comparisons. If it was simply a matter of the sea level rising, maybe you could do it. But how do you deal with whether or not climate change will produce a change in the pattern of African rainfall? You could sit down and have a theoretical model that says "if there is more rainfall in one area in one part of Africa and less in another; what I am going to do is move these people from X to Y to the still fertile bits of the country", but you would have to think through the political consequences of that because you would be moving them to communities where people might not want them; you would be moving them to places where there are existing property rights. To think about it realistically in all its characteristics rather than just the sea level effect, which is far the most easily understood effect, you would be into an incredibly complicated calculation of the political consequences of the adjustments that you would have to make, which would almost certainly have to involve significant movement of people. And the moment you have significant movement of people, you also have psychic costs. It may be all very well for you and I to say "with X cost we can move them to Y and they will be just as happy as before" but actually people do not think that. There are political consequences of moving people. That is why I tend to think that we should proceed on the basis of trying to reduce the likelihood of this occurring or reducing the extent of this occurring, with the confidence that there exists a set of technological ways forward which will make that, as I say, a manageable cost. As for the manageable cost, the way you do those calculations is that the GDP in 2050 will be 2 per cent lower than it would otherwise be. I am not quite sure what we call that; it is obviously an ongoing cost at one level but it is 2 per cent less and it does not go on getting bigger than 2 per cent for ever because it gets to a point where you have achieved the abatement that is required. Again, the range which was suggested in the DTI Options for a Low Carbon Future is from 0.3 up to 2; 2 was an extreme under one scenario where there was no autonomous development of renewables technology going on. The 2 per cent figure there was also for a 70 per cent reduction rather than 60 per cent and it was for the option where you had both excluded the possibility of nuclear and you had excluded the possibility or the feasibility of carbon sequestration and so had to achieve the whole reduction by renewables in the sense of wind and biomass. What they found is that if you only excluded one of those technologies, i.e. you could either have carbon sequestration or nuclear, then you are down at the 0.3 to 0.5 level. Even at the two per cent level, I would say this is a manageable cost. Certainly, compared with the great challenges of the 20th century like global war, I think you will find this ends up pretty trivial as a challenge.

  Q374Chairman: May I take you back to the answer you gave me? You said something with which I am sure the whole committee would go along, that there was no way that it would be right or proper for this country to try to avoid any obligations that might flow from the analysis that we are talking about. The question to me is: will that be enough in the sense that if we look around the world and look at the problems in India and in China, there are likely to be enormous increases in emissions. One witness said that the only way to solve this problem is to achieve a position within 50 years or so from now when fossil fuels are no longer an economic way of generating electricity at all and other technologies have developed to the point that they are the method of choice for other people to use to generate electricity. That requires an enormous development of technology and spread of technology and the really smart thing to do in the next 50 years is to develop those sorts of technologies which might solve the problem in a proper and a global way. What is your view about that?

  Mr Turner: I am sure we do have to develop those technologies. There are two ways to proceed and we should proceed on both. One is increased energy efficiency and the other more renewable sources of energy. Although there is a lot that can be achieved in energy efficiency, it is very unlikely to be enough in itself, so we also need new forms of non-carbon producing energy production. That does not necessarily mean not burning fossil fuels because one of the big technologies is carbon sequestration where you do burn fossil fuels but you then capture and store, and that should certainly not be excluded. I do not think we can exclude it because in almost any scenario, we are going to have a huge base of coal-fired power stations installed in China in the next 15 to 20 years. It is going to be quite difficult to prevent that. Therefore, even if those coal fired stations are subsequently replaced by completely renewable sources, developing the technology so that the CO2 that they do produce can be captured and stored is quite important. I do agree that the development of technology is key. The issue is: what are the instruments to do that? I think one needs the developed countries to commit to Kyoto-type limits. That begins to send out some signals to the marketplace of the direction that we are going and also shows willing on the part of the developed countries that we being the biggest polluters are willing to act first. The next step beyond that must at some stage be to get the big developing countries into some framework of mandatory limits as well. There will be different limits for them. They will be limits on the extent to which they are allowed to go up per capita, whereas developing countries are committed as to how much we go down. If we can get other major countries within the system of caps, through the emissions trading systems and the domestic policies that they will have to put in place to deliver those targets, that in itself will provide a major signal to the market which will push the development of technologies. I do not think that is over-optimistic. There is a tendency, particularly in American politics, to assume that China is not shifting. My understanding from people involved in China on this issue is that many Chinese scientists are very switched on to the issue of climate change. The policy makers are very worried about the long-term implications of pollution to the Chinese quality of life, including climate change. A Chinese Renewable Energy Act has recently been passed, which is proceeding towards enabling the provincial governments to put tariffs on fossil fuel electricity in order to try to encourage renewables. We have got to get those other major countries on board. There is an overall framework. There is a need for a global commitment to reductions. That in itself sends price signals. What one should not exclude, however, is that in addition to that perhaps we should be spending public money, including agreed international public money, for R&D on particular technologies. The thing about those particular technologies is that we should not just back one winner; we ought to be pursuing several strands simultaneously. One ought to pursue the strand of whether carbon capture and storage will work, but one should also put more money probably into photovoltaics. Those are the two big technologies which are at a completely different stage from wind or biomass. Wind and biomass are, in a sense, proven technologies not far off the cost of existing fossil fuels. Through the natural process of the market, these will tend to get cheaper and cheaper and will slowly cost in in more and more environments. There are major geological questions still to be answered about the feasibility of carbon storage. Photovoltaics may be one area where significant amounts of public money might drive some of the basic science and the basic physics required to bring that cost down. That technology is still several times more expensive than fossil fuel alternatives rather than, say, 50 per cent or two times more expensive.

  Q375Lord Sheldon: I want to follow up the Chairman's question on the international situation. We might get agreement here but getting agreement internationally is going to be enormously difficult. It is hard to get agreement on the nature of the problem, let alone the solution to the problem itself. Some countries can suffer more than others, some industries suffer more than others, and the agreement may only be possible in a crisis situation. I find it very hard to envisage the kind of crisis situation that might force people to come to terms with the realities. Have you anything to offer on this?

  Mr Turner: On the way to create a crisis?

  Q376Lord Sheldon: No, the way people might feel impelled to act?

  Mr Turner: I guess I am not that pessimistic. The US and Australia did not come in but there was a Kyoto Agreement across a large number of other developed countries. It is not the case that people in China in the policy development circles are sitting there saying "We are never going to take action on this". After all, they have the catastrophic problem of local pollution as well. Local pollution is a different problem from the CO2 but that local pollution itself is driving them to think about how they make sure that they end up being a rich country which also has a reasonably civilised set of cities to live in rather than a rich country covered by a pall of pollution. That creates incentives for people to act. Sometimes, yes, you do get particular things that make people concentrate. The severity of the heatwave in Europe two years ago, which does appear to be something to do with global warming, made people realise that this was for real and could have significant consequences. If it is the case—and the scientists are unsure of this—that the increase in frequency of hurricanes is driven by global warming, I think that in itself will make people sit up and think. You are probably right that on the whole this is one of those problems which can grow and grow and grow without us quite realising it until it is too big to deal with. That does put a responsibility on politicians, business leaders, intellectual leaders and leaders of whatever type to put these issues on the table and try to progress them, even in the absence of a bottom-up demand for change in the face of a crisis. Some adverse short-term developments will concentrate people's minds but you need political leadership and to be in discussion with scientists about what is going on and designing ways forward somewhat ahead of what, as it were, ordinary people might come up with if they were simply saying, "I have got to wait until I feel too hot before I do anything about it".

  Q377Lord Skidelsky: I would like to ask not a practical question but more of a theoretical one. How much credibility is applied to long-term forecasts of this kind, 100 year forecasts, even if they are dressed up as a range of scenarios? In 1936, Keynes' theory talked of all the economic consequences of a declining population, which was based on very well-accepted projections of a linear fall in population. That of course was then falsified by intervening events or a set of intervening events. I also remember 20 or 30 years back there was quite an intense discussion about global cooling based on pollution of the ozone layer or something like that. You might say that the scientific forecasts are very different from the economic forecasts but when the scientific forecasts depend on human activity rather than on purely passive natural things, then of course the distinction does tend to evaporate. The possibility of intervening events here is huge. That leads on to my second question, which is whether the real danger does not come from increased volatility as a result of changing patterns of weather, whether increasing temperatures or decreasing ones and therefore catastrophic events have been more likely, against which the precautionary principle as the bedrock of policy becomes very plausible indeed.

  Mr Turner: One has to distinguish, in thinking about the credibility of forecasts , between the scientific bit of it and the economic and industrial bit. Economic growth and industrial production produce emissions of CO2. Emissions of CO2 feed through to concentrations in the atmosphere. Concentrations in the atmosphere feed through to temperature differences. The relationship between the flow of emissions, the stock of concentrations and the temperature is something for climate scientists to tell us about. The determinants of the flow of emissions is something which economists, industrialists and people who think about technological trends can tell us about. If one thinks about the climate bit of this, you are absolutely right that there is a large range of forecasts, but there does appear to be at least a bedrock to our best understanding at the moment. We probably know that the earth's system absorbs about 4 gigatonnes of carbon a year in natural processes and therefore that when we go beyond 4 gigatonnes, we are increasing the concentration because there is not a set of naturally offsetting effects through forests, et cetera. We know right now that we are well above the 4 gigatonnes; we know that we are at 8 gigatonnes. We know pretty much definitively, as close to definitively as most things in life, that the concentrations in the atmosphere are going up. We get annual measures of this and those are going up quite fast. We have reasonable knowledge that we are now at 380 ppm. The best inference from scientific understanding is that this is well outside the range of 200-280 ppm which, as I say, we used to reach in the last 500,000 years of history, ie the whole of history which has had human beings in it. We are at the very least, as I said earlier, conducting an enormous experiment. We live in an environment to which the concentration of CO2 is vital; if there were no CO2 whatsoever, the temperature of the earth would probably be 30º lower, and we are doubling the concentration. It may be that as we double that, there is a set of offsetting effects which turn out to leave us as we were before, that the cooling effect of the actual soot in the air, which is the thing that cools, offsets the CO2 which is warming it up. But it would be quite risky to rely on that. The other thing that the scientific evidence is beginning to suggest is that there is at least the possibility of the non-linearities, catastrophic events, and not just catastrophic events like major shifts in the ice sheets but reinforcement of warming through the methane strata and the warming of the seas as well. All of that, when I look at it, makes me believe that we ought to try and fix the problem. In addition, when I then observe that the economic costs seem to me utterly manageable, I think why on earth would one not fix it? If you go back to the bit of the problem which is economic and industrial, of course the emissions flow does depend on forecasts of population growth, economic growth and the energy intensity of growth. Those are the three key things that go into this. You can debate any one of those. But some order of magnitude figures make you realise that unless something changes, we are not going to be emitting 8 gigatonnes against 4 gigatonnes of natural absorption capacity; we are going to be emitting much more. Asia at the moment has per capita emissions at about one-fifth of Europe and one-tenth of the US. Let us leave the US aside. That means that if Asia industrialises, if it achieves by 2050 our standard of living of today, which I think is not an unreasonable economic path (it is what Korea has done over the last 50 years, so why should not China do it as well?), and if by that time they are emitting as much per capita as we are emitting, then they will be omitting five times as much as today, even if their population stabilises. I do not have the figures to hand, but clearly that will produce a huge increase in concentrations; we would be way up what looks like the dangerous range of developments. That is even with, a slowdown of world population growth; not actually a fall but, say, the UN median forecast of 10 billion people by the end of the century. Of course, what may occur is autonomous developments in technology that mean that the emissions fall naturally without interventions. The good news about those is that, if they occur, the cost which we were talking about earlier is not going to occur. If we get a set of autonomous developments in technology which do not even require a stimulus of policy, that would be fantastic. It would mean that having set off on a course of policy which had some initial costs, in the final stages the policy would not have any costs at all because renewed change would be autonomously happening. The big uncertainty is technological change and I do not think that is an argument for inaction. The argument is: let us take actions which maximise the chances that those beneficial technological changes do in fact occur.

  Q378Lord Layard: To follow up on the international issue raised earlier, you have two problems: one is how to get individual countries to agree as to their share of the burden; and, two, how do you get enough technological development to deal with the problem? I wonder if there is not, as far as countries are concerned, a difference between a quota, which seems to be cutting your own throats for the sake of the common good, and taxation, that you tax something and keep the tax proceeds. I know that in pure economic theory there may not be a difference. In terms of meeting an international agreement, it seems to me that if you were going for a common carbon tax and each country would retain the proceeds of that, this could be an easier thing to agree. I do not know. The second point: if you had the proceeds of the carbon tax, you could then perhaps agree to devote all or a proportion of it to this basic R&D. We know that is needed because again there is the public good aspect and companies will not do as much as is necessary to overcome the fundamental problems of some of these technologies. What do you think of a carbon tax dedicated to R&D compared with the existing, if it is existing, route of quotas?

  Mr Turner: I think we will need to go down the quotas route as well. We have a political governance issue and I think the only tenable long-term policy is something like close to equal per capita rights to emit CO2 into the atmosphere. It will take us a long time to get there but I think that is the only deal which is do-able on what is a shared public good. The quota approach has the advantage that you get nations, or the European Union, together to commit to overall trends in quotas and then they pursue a variety of policies in order to achieve more quotas. These could include tax, emissions trading, regulation, be it of household design or of engines, et cetera. We need to combine multiple elements; stimulated by quotas . Should we have a global carbon tax? The thing to be said about global carbon tax of course is that if you want money put into this stuff now, most of the money is going to come from the developed world because that is where the money is today. The money put into R&D on basic science today will come mainly from the US, Europe, Japan and the other rich countries of the world. Though there is also research going on in China as well. My concern would be that we might spend too much time trying to pursue a carbon tax to which everybody contributes, including India, Indonesia and China, and put a lot of political energy into something but that the only do-able deal is one where the total amount from India will be relatively slight compared with the amount from the EU. If that is the case, why do we not just spend more money on R&D in the EU? I do not exclude this as part of the long-term structure of global governance required. But I think the post-Kyoto quotas are probably more important as a political way forward. It is true to say that it would be very useful, for instance on photovoltaics, to have more public money. And it would be useful in policy development to systematically work out whether more money is likely to make a lot of difference. I mean by that really working out whether there are fundamental physical and scientific barriers to the speed at which we are progressing and whether it is reasonable to infer that significant money could overcome these. I think photovoltaics is a very interesting technology in its potential but also in its current costs. For much of the sun-drenched bits of the world, it is a very obvious technology in the long term but at the moment, unlike wind and biomass, it is not getting close to the fossil fuel cost; it is still several times bigger. You might not have a global tax but you could imagine this as part of an agreement between the US, Europe and maybe some other countries jointly to put money behind some of these basic research elements. There could be an ad hoc agreement to do it rather than a full-blown carbon tax, which on a global level becomes very complicated because you have to work out the fair rate for everybody.

  Chairman: May I thank you very much indeed. This is clearly a big subject and you have contributed to our discussions in a most meaningful way. I am very grateful to you for coming.

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