Select Committee on Economic Affairs Minutes of Evidence

Supplementary letter from Professor Michael Grubb, Cambridge University, Imperial College and the Carbon Trust

  The Committee asked me to address in writing their final question, which was sent to me as:

    Q: Assuming climate change is real and serious, and given the very long list of non-carbon or low carbon technologies available or nearly available, what do governments, including ours, have to do to make the seemingly very large push needed to get the transition to low carbon moving? Or is this really an issue for industry and for ordinary citizens to change their behaviour without relying on government so much?

  I have seen no evidence that a fundamental problem of "global public goods" such as mitigating climate change can be addressed primarily through private or corporate actions without a significant role for governments. Undoubtedly, some progress can be made through the combination of general public concern operating in a privatised system, for example people willing to pay a small premium on their electricity bills to buy from renewable energy providers. However, the take-up of such schemes remains very modest (arguably a rational reaction, since individual contributions are insignificant in the absence of wider societal action—a classical problem of collective action).

  Also, there is considerable variation in the degree to which companies are acting on climate change. However, it is notably that the most forward-looking companies on this issue have also been amongst those most openly calling for government regulation, since by their nature, their prime responsibility has to be to their shareholders and they cannot therefore bear significant costs unless their competitors are also required to do so.

  In delivering energy efficiency, its apparent cost-effectiveness would appear to give more scope for unilateral actions. However in practice, both survey work and barrier analysis conducted by the Carbon Trust does indicate that effective delivery still requires a combination of regulatory and support measures. With the exception of energy intensive companies, for many others energy costs remain below the threshold of "don't know and don't care", treated as an unavoidable operational cost rather than as an assessed procured good. Without regulatory drivers—such as the CCL/CCA package and mandatory energy efficiency labelling and/or standards, most such companies remain indifferent to both climate and energy cost considerations, and may well not even draw upon support available. Conversely, without support (to increase their access to relevant information and services at minimum transaction cost), most companies cannot respond in the most efficient way to regulatory drivers.

  I also wish to recall the section of my written evidence on the topic of innovation, and in particular the observation that:

    The energy sector, and in particular utilities and buildings, are regulated sectors with exceptionally low inherent innovation. The bulk construction industry is notoriously conservative, also the utility industries are less than a tenth as R&D-intensive as sectors like information technology or pharmaceuticals. New technologies do not offer the marketing incentive of product differentiation (insulation, or new generation technology, does not change the product that final consumers see). We are seeking radical innovation in sectors which have been dominated by the same basic set of technologies for at least half a century. Furthermore, they are regulated sectors in which regulation does not reward, and may deter, innovation.

  Whilst measures that help to "internalise" carbon-related damages, such as cap-and-trade systems, can help promote the use of technologies that already commercialised and close to being economic, is naive to believe that this—even combined with traditional R&D and patent protection—can unlock major innovation-related investments in such sectors, where numerous existing barriers to innovation are compounded by the uncertainty and political risk about future carbon prices.

  Thus in my view, in addition to measures such as the EU ETS, there is an important role for government in fostering innovation in low carbon technologies, again with a core need to get the right balance of support measures (eg funded RD&D, technology incubators, etc) together with regulatory drivers targeted at building up commercially viable low-carbon-technology industries at scale (such as incentivised markets for renewable energy).

  The Committee's Question, "what do governments, including ours, have to do to make the seemingly very large push needed to get the transition to low carbon moving?" is a very big question, to which I have given some broad reactions. If there is interest in mores specific instrumental assessments, I could offer more detailed input drawn from my roles as both coordinating the "System Evolution and Incentives" part of the Research Council's SuperGen initiative, and also in my role overseeing the Carbon Trust's current assessment of options for reform of the UK Climate Change Programme. But my understanding of the Committee's brief, and specific question, was at the higher level, and I have sought to address my remarks accordingly.

  I hope that this addresses your request and that my evidence overall has offered a useful contribution to the Committee's deliberations,

11 April 2005

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