Select Committee on Economic Affairs Minutes of Evidence

Examination of Witnesses (Questions 379-388)

Professor Michael Grubb

15 MARCH 2005

  Q379Chairman: Good afternoon, Professor Grubb. Thank you very much for coming to talk to us and for the written evidence you have sent to us, which is very helpful. You have been here many times and you know the form. We will try to keep the questions short and perhaps you will keep the answers short. Do you want to say anything before we start our questions?

  Professor Grubb: Only to thank you for the invitation and say that it is an honour to be here.

  Q380Chairman: We have had a lot of evidence on the IPCC emissions scenarios. The message we are getting is that the high emission scenarios are not very credible. There appear to be various problems with the IPCC exercise: exaggerated global growth rates; non-credible population projections; wrong assumptions about the rate at which the rich and poor economies will converge; and the misuse of exchange rate assumptions. I wonder what your view on the high scenarios is. Are they credible or plausible? Our worry is that the IPCC may have created unnecessary alarm with its high projected warming rates. What would your view be about that?

  Professor Grubb: The first thing to say about the IPCC scenarios is that they do span a very wide range. I would say the very high scenarios are probably a bit less improbable than the very low scenarios, in the absence of any policy action. I do not consider either extreme particularly likely. On this particular point, I would refer you to my written evidence and to a diagram I deliberately included because I wanted to try to get away from the very detailed assumptions about purchasing power parities and convergence rates. The diagram tries to illustrate that our starting point is one in which, as the evidence earlier indicated, developing countries are emitting maybe one-fifth of what we emit and one-tenth of what is emitted in the US and yet they constitute about four-fifths of the global population. It does not seem to me incredible that for the rest of this century they will aspire and possibly succeed in reaching something close to current levels in rich countries. In that case, I think scenarios which double or treble global emissions from present levels are actually disturbingly plausible. To some extent, a lot of the detail has been a distraction from that core fact. The IPCC's high scenarios are in the region of a bit more than a trebling of current emissions by the end of the century. Regarding convergence of developing country economies, I think the future, as we have said, is intrinsically very uncertain. If you look at the recent growth rates for India and China, which—let us face it—are a very large part of this particular puzzle, those have exceeded anything projected in the IPCC. I would add one other point and that is that the scenarios of the IPCC are technologically quite rich. Their low scenarios involve a considerable move towards low carbon technologies; their high scenarios assume that, as the oil market, if you like, gets a lot tougher, it is harder and harder to find conventional oil and that the world's transport system will start to move towards coal-based liquefaction. If that were to happen, and that is I think the direction in which current investment would be pointing if there is no policy to counter it, a trebling by the end of the century is not incredible. No, I do not consider them highly improbable.

  Q381Lord Skidelsky: We have heard relatively little about the Kyoto Protocol. Some witnesses have been clearly telling us that it does next to nothing for rates of warming. Is that your view and, if so, can you tell us why very little happens? I think it is actually not your view because in your written evidence you call it basically a sensible package. Could you elaborate on that?

  Professor Grubb: Yes. I must admit that I find the statement that Kyoto does not achieve anything a very strange argument. I think it may reflect quite a misunderstanding of what the Kyoto Protocol really is. Let me start by saying there are four what I call really core elements to Kyoto. The first is that it is a commitment to a process of negotiating quantified limits on emissions, to be negotiated sequentially over time as knowledge and evidence accumulates both about the problem and our knowledge of the progress in tackling emissions. Second, it sets quantified targets for industrialised countries in the first period, which are average emissions for 2008-12. Third, it embeds that in a range of economic mechanisms which are called Kyoto mechanisms, like emissions trading and joint implementation investments. Fourth, it engages developing countries through a range of mechanisms, including the basic standard reporting packages, but also through provision of technology transfer and the clean development mechanism. In the context of your immediate question, the first one of those is the most directly relevant. I refer you back to the first question, which was about emissions trajectories over the century. Viewed in that sense, the Kyoto Protocol's numbers attach to its first commitment period and, if we were to repeat five-year commitment periods, that would be the first out of 18 such steps over the century. I guess one can draw various analogies. You do not make the journey if you do not step on the train. The journey of 1,000 miles starts with the first step. There are many other analogies. If Caesar had crossed the Rubicon but then sat there for the next 100 years, his would not have gone down in history. The opening up of the possibilities and the commitment to go on a journey I think are absolutely central to Kyoto. The other point I would make is that I think delivering on the first round of commitments will be very important both in demonstrating the viability of some of the emission control policies and associated technologies and helping to embed the technologies in the industries which deliver them. Then they are in a position to deliver bigger reductions in the future. I think you will gather that my view is indeed for the Kyoto Protocol. The statement that its impact is trivial is a vacuous statement, it misses the point of what the Kyoto Protocol is and is there for.

  Q382Lord Skidelsky: On the first point of the Kyoto Protocol, of the binding limits on overall greenhouse emissions, to what extent do you think there are natural limits, if you like, which arise from economic growth itself? That is, you have described it as the Kuznet's curve, the decoupling of emissions from growth, so as countries become wealthier or their income per-capita increases, there is a proportional increase in CO2 emissions. To what extent can you rely on that to slow down the rate of our CO2 concentration by what you would call the growth process itself?

  Professor Grubb: I will make two comments in relation to that. One is that the idea of the environmental Kuznet's curve has a long history and it has been traced in various pollutants. Countries emit more as they start to industrialise and then at some point their emissions start to go down. The most essential point of that debate is the recognition that it is not an autonomous process, it is driven by regulations because as countries get richer they start caring about the environment more, they develop the legislative, institutional and, indeed, technological capacity and legislation comes in which tells industries to clean up its act in ways that were not a priority during the early stage of the legislation. I think it would be a fundamental mistake to think the Kuznet's curve is a description of some autonomous automatic process which gets governments off the hook of having to do anything. It is more of an expression of the impact of government regulation. The second point is that in the area of carbon—this is an area I have done a certain amount of research on—it is a really complicated and messy situation. If you look at the data, it is quite clear that the early stage of industrialisation, getting up to 5,000/10,000 dollars per capita, may get you up to emission levels of something like one and half tonnes, maybe two tonnes, per capita of carbon. I have to say, even though one recognises those industries are pretty inefficient, there is absolutely no denying the fact that basic industrialisation involves a lot of construction and other heavy industry which is going to emit and, also, the beginnings of a consumer economy. The data after that is surprisingly scattered, it is all over the place. Very rich countries do not necessarily emit more per capita than the ones in the mid-range income. It would make a huge difference to the future whether, in a sense, the norm was something close to one and a half tonnes of carbon per capita or something close to five, that would make an enormous difference to our future prospects. We have some technological prospect for seeing something more like the classical Kuznet's curve, by seeing those emissions really coming down. Some of that remains mired in technological uncertainty about industrial substitution processes and so forth. As was discussed with Adair Turner, there is a lot of scope for innovation as well in non-carbon energy services. The core point I was trying to make is it does not look hopeless because there is no iron law which is saying, "As we get richer we must emit more", essentially it is saying we have passed the stage of inevitable emissions growth based on current technology, and there is a lot we would expect to be able to deliver in terms of emission reductions, and if we start down that path it could take us a lot further; we do not quite know.

  Q383Lord Layard: I would like to pursue that. You have given us a fascinating figure, to make very low carbon power systems viable globally will probably cost 400 billion dollars over the next few decades. There are a couple of questions on that. Firstly, how does that compare, as a share of the world GDP, for example, with the cost of the moonshot? Secondly, can that money be effectively spent if it is raised—I am not sure how much of that you think would have to be raised—from public sources and can you tell us your picture of how the Government can induce innovation? How much has to be basic and, therefore, publicly supported and how much can be at a developed level where private entrepreneurs will get their money back? Can you give us your picture of how this innovation process can optimally be developed? What kind of international agreement, if any, is required to make it happen?

  Professor Grubb: That is quite a set of questions, if I may say so. On the first one, I was citing the figure from the International Energy Agency. To put that in context, the estimated investment requirements of the global electricity industry, over the same period, are about ten trillion dollars. So in the order of, or maybe a bit less than, one twentieth of the projected investment needs of the electricity sector, if you believe those IEA numbers, is what would be sufficient to flip us from a high carbon path to a low carbon path in electricity. I would not wish to say that is a small amount of money, but you asked me to set it in context. In terms of global GDP, I believe electricity is between one and two per cent. So the additional low carbon innovation investment looks like less than 0.1 per cent of GDP. Whose money would that be? I think one thing we have learned is that purely spending Government money on some blue skies technologies very often does not deliver the goods as well as we might like. It can deliver a constituency of people who depend upon Government money, whilst mainstream industry continues with the technologies they trust; they have to be engaged. We have to make sure a considerable part of the money required is private money going into investment and innovation. As for the instruments which would help deliver it, I think we need a suite of instruments. I think some kind of carbon price or carbon cap and trade mechanism is very important, partly because it sends the right signals that there will be a value to lower carbon technologies in the future, also, it is quite important that we start trying to deter too much of that ten trillion dollars going into new coal based power plants because once you have sunk that capital into high carbon emission stock, it is going to last for 50 years, you have a much bigger economic problem. I think the role of a cap and trade system in simply firing a major warning shot against financiers thinking of funding coal power stations is a very important role. I do not think it is sufficient to stimulate a lot of industrial low-carbon investment by the power sector. Let us remember we are talking about a sector which is extraordinarily low in terms of its innovation investment. I believe the R&D intensity of the utilities is certainly under a twentieth of that of, for example, pharmaceuticals or information technology. This is a sector which has stayed rather conservative and is very wary of investing very much in innovation and we want it to deliver a lot more innovation. I think it would be very hard to expect them to go to the City of London and say: "Can you lend us a billion for investment in a speculative technology because governments are introducing a cap and trade system and we do not know what the targets are and what the price is going to be in 10 years' time, but please give us a billion pounds anyway". I do not think there is an investment security which justifies the more speculative innovation investment one needs. I think that is why we need a suite of other instruments. I think the renewable obligation certificates certainly played a useful role, but by no means are they the whole story.

  Q384Lord Macdonald of Tradeston: Professor Grubb, I still have a problem with the relevance of the efficacy of Kyoto as you describe it. It is an internationally binding treaty, as we understand it, in international law, but that would not seem to mean very much if the punishment for non-compliance now is stricter emission targets in the next round of agreements. What is the incentive there for people to sign up and punish themselves for non-compliance? The other thing is, since it seems that so few countries are on target for their Kyoto agreements, is there not a big risk of people simply concluding that they have somehow been fooled into thinking that this agreement, which has been rather fetishised in some quarters, is hugely important and effective?

  Professor Grubb: Certainly I think there is a problem with any agreement which is either fetishised or, for that matter, demonised, we would seem to have equal dollops of both, for Kyoto, which is perhaps unfortunate. You asked two questions, let me take them in turn and, also, perhaps, just underline my answer to the earlier Kyoto question, which is somewhat rephrasing the first step, and that does sound a very boring thing to aim for. I think if we balk at the first step and cannot deliver it, then we can be fairly sure we are not going to make the journey. The first part of your question is really about participation and compliance. Participation, obviously we have seen that the US was not willing to deliver its Kyoto target and is disputing the regime. On the compliance of 140 odd countries which have ratified the Treaty, there is a fairly basic question here which is really not about the Kyoto Protocol, it is about international law. Why do countries sign up to agreements and stick to them? Why do they sign treaties? Why do they ratify them and why do they then generally deliver their obligations rather than just walking away? The Kyoto Protocol is slightly unusual in that it at least specifies some consequences of non-compliance. Most treaties do not specify any consequences at all, but countries still stick by them. In a sense, that is not really a question to an economist, but I had my 10 years at Chatham House and the answer is international law does matter. It is wrapped up in a very elaborate process of negotiation, adoption, signing and then ratification, and ratification is the process by which the national legislature says: "We understand what we are committing ourselves to doing and entering it into our domestic law". If they then turn around later and say: "We did not really mean it, it is all too difficult", effectively they are undermining the whole body of international law and the processes upon which it rests. In a sense, that is the best I can give you as an answer as to why I think the countries that have ratified Kyoto will not simply just say: "It is all too difficult" and walk away. Your second question was, is that not by implication what they are doing, many countries are not really on course for their Kyoto targets? In this context, I think it is particularly important to understand the flexibility dimensions in Kyoto, namely the international trading mechanism and the international investment mechanisms. Countries can choose to meet their targets either through domestic implementation or through international trading and investment. For example, the Netherlands has long stated that it intends to deliver half of its target at home and the other half through international purchases. In fact, slightly paradoxically, the global deal around Kyoto really hinges upon countries not completely delivering their targets domestically because it is the gap between domestic emissions and national targets under Kyoto that drives all the foreign investment to acquire emission credits through the clean development mechanism and so forth. If every country delivered its target entirely domestically, Kyoto would probably come unstuck as developing countries and Russia would say, "There is nothing in this for us because no country needs to buy anything or invest anything in us". At the end of day, my guess is there is enough political force and legal force that countries will legally comply and those considerably adrift domestically are going to have to be investing a lot more internationally.

  Q385Lord Macdonald of Tradeston: I suppose you will agree with the third part of my question then, and that is, what the public reaction would be, because as I understand it from the witnesses we have heard, even if all those countries did what was required of them under Kyoto, the delay in the process of global warming would be virtually insignificant. If the general public understood that, do you not think that would further undermine the credibility of this process?

  Professor Grubb: That comes right back to the previous question on Kyoto and its impact. I think the general public can understand that if you are faced by a big long-term problem, you do not expect to solve it all in the next five years. You have to do things which you can manage on the next step and then move on to a subsequent round of negotiations, which may include deeper reductions, more countries and so forth. It should be within our reach to communicate that to the public and to accept that once the deal is struck, you should honour those commitments.

  Q386Lord Elder: I am still on Kyoto and the US position on Kyoto. I wonder if you can sum up for us, please, your views as to why the US did not ratify? I guess what is important about that is it might give us some indication as to what the chances are of getting the US involved in future processes.

  Professor Grubb: In a sense, it is the billion dollar question, certainly it is key. I think there are several answers as to why the US pulled out of Kyoto. First, they had a tough target; secondly, very little had been done in the United States during the 1990s on their emissions, so by the time President Bush came into office, the cliff really looked extremely big in terms of domestic implementation and/or the US would have had to invest a lot internationally in a way that the Republican Party was certainly not willing to countenance. From that perspective it was a very understandable decision in terms of the view about the US target by the time President Bush came into office. However, it is true to say, also, that the whole debate was highly politicised. This was viewed as Clinton's treaty and many Republicans hated the Democrats for basically pushing through and designing Kyoto in a way that was going to require substantial action by the US. Certainly, some of the statements, at the time, made it quite plain that President Bush was rejecting Clinton's treaty. He was not worried too much about the rest of the world because he was not really thinking about that. Obviously there is a fair amount of politics around fossil fuels and its influence through the US Congress. Those were the bundle of reasons for the rejection. As to the chances of getting the US back on board, I think it is very important to be clear about the problem. In my view the problem in the US, at present, is not specifically about Kyoto, it is about the reluctance of the US administration to do anything substantive about its CO2 emissions. That is a different problem, it is an even more difficult one to tackle. I think that is the problem. I do not think you would throw away a viable treaty just because one party does not want to solve the problem. That is an overly strong statement, but what I mean is the present Administration is very reluctant to do anything which would involve it taking action now to limit emissions in a significant way. I think that situation will change. There is a lot going on in the US on this issue and a lot of it is swelling up from state level action or from other quarters; some of it is stimulated, also, by efforts in this country and others. I think then you have to ask the question, if and when the administration shifts its position and recognises it needs to limit emissions as well as doing technology stuff, what will it be looking for? I think what it will be looking for, first and foremost, is a framework which is economically efficient, that covers the full range of greenhouse gas emissions, for example, but allows use of flexible instruments. I think they will realise, possibly to their discomfort, that starts to look an awful lot like Kyoto. Let us remember Kyoto was very largely designed by US economic advisers. It was very much a US designed treaty inspired by US concerns about economic efficiency and that is why it has got an unprecedented array of economic instruments and that is why its commitments do not single out CO2 in buildings or anything. They say, "The job of a country is to agree it is limiting its overall emissions" and then each country should be free to sort out how to deliver that. I think the Administration would come back to something pretty similar in its final design. Perhaps I would add one other thing, which is I think it is relevant to that discussion to note that President Bush, when he first rejected Kyoto, promised to come forward with a credible alternative and has not done so. I think that is because they have realised it is very difficult to fashion a credible treaty which is structurally totally different and does not involve those core features.

  Q387Lord Lamont of Lerwick: Is it not arguable that this is not really a matter of party politics in the United States? Even when Clinton was in the White House, not a single senator indicated he was prepared to support this. That may be reprehensible, but is that not an indication and an illustration of the adjustment of the cost as they perceived it? I do not think it was so much party political manoeuvring, as you were seeming to imply, but that is just on the side. I wonder if I can move you on to China and India, which have featured very largely in our discussions. Obviously they enjoy phenomenal rates of growth which is exciting at the moment. What do you think the prospects are, in the next five to 10 years, of them having emission controls and targets? If they do not, are we not imposing a rather pointless burden on ourselves?

  Professor Grubb: Firstly, I accept your point about party politics, if you thought I was implying it is purely party political in the US, it is not; it is much more deep rooted cross-party in terms of both opposition and support for actions. I was merely referring to some of the issues around, specifically, the rejection of Kyoto. I think your question about developing countries, again, is absolutely crucial. One does have to draw quite an important distinction between targets and measures. It will be a while before developing countries will agree to total national emission caps, certainly not until after the US is back in the system, for a fairly obvious reason. I do not think that precludes them possibly agreeing internationally to certain measures. There is a slight paradox, I find, in having observed the international negotiations, that a lot of developed countries tend to talk-up the actions they are taking at home a great deal in the international discourse. A lot of developing countries seem to almost talk it down and deny that they are doing anything because they do not have any responsibility to do anything and that is their national position. In reality, quite a lot are, India has a renewable energy ministry and targets, China has a renewable energy portfolio and vehicle standards; there is quite a lot going on. All I can really add is they are big sovereign countries and nobody is going to force them to do things if fundamentally they are opposed. I think the prospect of developing country action certainly is very bleak, if we cannot deliver and sustain action on the topic ourselves. I believe the economics of our own action may have some very fortunate spillover effects partly in terms of demonstration, but, also, in terms of technological development, new industries that will reach out and then perhaps deliver their biggest emission reductions over subsequent decades in developing countries, and potentially do big business into the bargain.

  Q388Lord Sheldon: Many of our witnesses—and this has come up this afternoon—have spoken about the huge costs that we are talking about, although, rightly, I think you and Adair both stress that it is the relative cost rather than the magic of the absolute figures which you have been looking at. If I can narrow the subject from the global side back to the UK: the UK has set itself ongoing 50 year targets well beyond Kyoto, with a 60 per cent reduction target, but has placed the emphasis very much on energy efficiency and improving all of that. It has not left a message with the public that there is a huge cost out there somewhere, even if it is much lower and we should forget the abstinence. Are we being naive or do you think we are being realistic? What do we think in the UK?

  Professor Grubb: Can I give a couple of reactions: one is I am very sceptical about any very specific numbers 50 years out; there is bound to be huge uncertainty. I think we can put bounds on it. I heard Adair Turner, in a sense, pretty sensibly put the reasons why it would be very unlikely to be bigger than several percent in terms of GDP and the kind of reasons why one might think it could be quite a lot lower. I believe you heard, also, from my colleague at Imperial College, Dennis Anderson, last week on that topic. My other broad comment is that I slightly worry if the message being communicated is this is relatively cheap, because that is all relative. It is still big compared with a lot of other public good projects. Also, if one correlates relatively cheapness with really very easy to do, I do not think this is easy to do. Let me quickly touch on the energy efficiency emissions you have raised. There is no doubt that there is a huge potential for energy efficiency, where I believe that our economies differ from the theoretical maximum by a factor of 20 or more. There is very big potential for stuff which we know about, which looks also to be fairly cost effective. There are a heap of questions as to why do people not use more of it and what are the real economics of getting people to change, industries and households to change? Part of the answer is people are reluctant to change and can do with a little bit of carrot and a little bit of stick. I think it is quite important to look at the actual evidence of real programmes. As you probably know, I now work half time for the Carbon Trust. The Carbon Trust's Energy Efficiency Programmes last year were evaluated to result in a total of about £200 million in investment, yielding about £500 million of energy savings over a lifetime, and about £25 million of that was public money. I think that is good business. Obviously there are some hidden costs which cannot be captured in those calculations, but if they were dominant I don't imagine that industries would be so ken to work with the Carbon Trust.

Chairman: We have to go and vote. We have got one question left to ask, so I wonder if it might be more convenient to you if you give us the answer to that in writing rather than coming back after the division. If that is acceptable to everybody, I think we will draw this part to a close, otherwise we will not be back for about 20 minutes or so. I think the reality is that some of us would find that difficult. Can I say to you, thank you very much for coming and thank you once again for the written evidence and for the helpful way in which you answered our questions which we much appreciate. If you can give us a good answer in written form to the last question, we will be very grateful.

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