Select Committee on Economic Affairs Minutes of Evidence


Examination of Witnesses (Questions 400-419)

Professor Paul Ekins

22 MARCH 2005

  Q400Lord Skidelsky: The Energy White Paper seems to argue that the UK can get to its 60 per cent target with a combination of energy efficiency measures and renewable energy, but is that realistic? If energy efficiency is as cheap as you seem to suggest, as the MARKAL model seems to suggest, why will it not happen anyway just through normal, market processes?

  Professor Ekins: On the first of the issues, it is technically imaginable that we could arrive at a 60 per cent carbon reduction in 2050 on the basis of implementing current and developing new energy efficiency technologies and developing new renewables technologies. That was one of the four scenarios which the Royal Commission elaborated and it spelt out in some detail the huge number of renewable energy machines, power plants, wind farms, biomass and all the various ranges of renewable energy technologies that would be required in order to achieve that target. I have little doubt that it is technically feasible. After all, it is still 45 years away and we can get a lot of technical change in 45 years. The Government certainly perceived in the Energy White Paper that it would be interesting to test that particular option. That was why we had the renewables obligation which started to force some of these technologies to be developed and to pull them through the market. There is some evidence that with regard to wind power at least, both onshore and offshore, that is being quite effective. I believe the National Audit Office in its recent assessment of the renewables obligation suggested that, despite quite a slow start up of the implementation of renewables, we were likely to meet the 10 per cent generation target in 2010 and move towards the 20 per cent generation target in 2020. It is not unreasonable to say that that is a possible scenario. The scenario does depend very heavily on energy efficiency, which was the second point you made. There is a lot of controversy between and among economists and between and among everybody else on this particular issue because, on the face of it, it is very surprising that if energy efficiency measures can be implemented at net profit, whether to households or businesses, why they do not do it. I suppose, like anyone with conventional economics training, I was very sceptical of this thesis. I began to look at it and I began to be convinced by the evidence that came out of various policy measures which suggested that people had indeed, when they were coerced or bribed to save energy, saved money as well. I began to read some of the theoretical literature that was exploring as to why this market failure might be going on: issues of information, of invisibility of technologies, of deep boredom. Energy efficiency technologies are deeply boring to most people. Energy takes a very small proportion of most people's budgets and they do not think very hard about it. They would much rather be thinking about other things. Then you have the more technical issues such as landlord/tenant problems where people do not have the incentives to invest because they do not get the return. I have referenced quite a long, scholarly book on this matter in the evidence that I gave you, which I find convincing when allied to the stories from both businesses and households. Programmes run by the Energy Saving Trust, or the climate change agreements that were introduced with the climate change levy, do appear to have saved large quantities of energy at net gain. To what extent this can continue, whether these low hanging fruit as they are sometimes called will reappear once they have initially been gathered, is a very difficult and interesting question. I am certainly of the opinion that at least 20 per cent of energy in both household and business use could be saved at very little net cost, if indeed any at all. It is that kind of perception that was driving that particular part of the White Paper.

  Q401Lord Skidelsky: Can I refer you to your evidence on this? You say that the fact that subsidies exist to promote energy efficiency suggests that the White Paper underestimates the cost of energy efficiency, which seems to me quite an important statement. You go on to say that it is possible that these subsidies are needed to overcome a number of non-financial barriers—and you refer to landlord/tenant issues and the likely disruption to homes—but you also include in that capital constraints. Could you say what you mean there because that does not seem to me to be a non-financial barrier.

  Professor Ekins: You are absolutely right and when I was reading that section again I crossed out the words "non-financial" and put "social market failures".

  Q402Lord Skidelsky: I did not get that.

  Professor Ekins: You did not because that was not in the evidence that I circulated. I have also not been sufficiently clear on the previous sentence which you quoted. This is a point that has been put to me in discussions about these issues. If energy efficiency was so cheap, we would not need to subsidise it to the extent that we do and therefore the fact that we have these substantial subsidies means that it cannot be cheap. I was saying that that does not necessarily follow because if the financial subsidies are required in order to overcome these social market failures, some of which are non-financial but some of which, as you quite rightly say, are financial in terms of capital constraints, it is possible that you need a subsidy in order to overcome those barriers but once you have done it the benefits outweigh the costs. That could be achieved just as easily through regulation if one were to set up a general standard which households had to meet.

  Q403Lord Skidelsky: What do you mean by "capital constraint"? I can see it for nuclear energy and things like that.

  Professor Ekins: I mean something quite different. Many people living in very energy inefficient households could save a lot of money but, comparatively speaking, they do not have the capital to invest because they are relatively poor.

  Q404Lord Vallance of Tummel: Can I take you back to the overall target, the 60 per cent reduction by 2050? In your written evidence, you mention the UK Energy White Paper 2003 and you say that it included the cost of reducing CO2 emissions by 60 per cent by 2050 was in the range of £200 to £300 per tonne of carbon. When the Defra witness came to see us a few weeks back, he said the current government view, although under review, was that the social cost of carbon lay between £30 and £140, with the most likely figure being £70. On the face of it to a layman, if that is the social cost of carbon and the policy is to spend somewhere between £200 and £300 per tonne, it does not weigh up, or have I misunderstood?

  Professor Ekins: No, I do not think you have misunderstood at all. That is why these numbers are both very important and extremely powerful. If the numbers are right in that getting on for a 60 per cent carbon reduction trajectory will cost us £200 to £300 per tonne of carbon, but the damages of climate change are only between 35 and 140—and they are being discussed again at the moment—the 60 per cent trajectory is a bad policy assuming that this is an economic issue which is purely to be decided on economic grounds. In other words, you are not considering any of the other kinds of moral arguments which may or may not have weighed for certain people.

  Q405Lord Vallance of Tummel: Is not the idea of the social cost of carbon bringing in all the externalities to that cost?

  Professor Ekins: I have tried to understand how the social cost of carbon is calculated. It is often quite difficult because the techniques used are quite complicated. They involve such things as the value of human lives or arriving at a value of a statistical life. That seems to me to be very much the same thing because you then decide whether you are going to save that life or not on the basis of the value you arrive at. Some people find that that is not an acceptable way to proceed, so they object to those kinds of valuation processes in principle. Then we have these issues about these very difficult estimations of impact about which there is very great uncertainty. There are some people who, on the basis of those estimates, arrive at a cost very much greater than £200 to £300 per tonne of carbon. Also, there is the issue that it is perceived that, because most climate change damage is in the future, the social costs of carbon which are calculated now are the damage inflicted by the tonne that is emitted now. That is unlikely to be the same damage as the damage inflicted by a tonne in 2050 if, by 2050, climate change damages are much increased because of the role of the discount rate over a period of time of 45-odd years. One arrives at these enormous uncertainties. To be honest, I do not know in the Energy White Paper whether that £200 to £300 per tonne of carbon was estimated as being the marginal social cost of abatement in 2050 or whether it was some kind of aggregate of the costs of abating carbon between now and 2050, or indeed whether it was the average cost of abating carbon, because obviously all these numbers are somewhat different, have to be calculated in different ways and they mean rather different things. If you put that kind of detail in a White Paper, the White Paper itself becomes rather difficult. There is a lot of technical material that supports the White Paper but, as far as I am aware, that issue of how they arrived at the £200 to £300 per tonne of carbon is not part of it and it is certainly not a part of it that I remember. I stand to be corrected if you can find it.

  Q406Lord Goodhart: In view of the very considerable uncertainty there seems to be about what, in a few years' time, are going to be the costs of various kinds of renewables, is there not a case for saying at this stage that we should not go for what may turn out to be wasteful expenditure on kinds of renewables which turn out to be less efficient than others and that, for the time being, we should concentrate in addition to energy efficiency perhaps on research and development of renewables rather than going into their full scale implementation?

  Professor Ekins: This is a finely balanced issue. The one thing we know about the costs of new technology is that they only come down to the extent that they are implemented. The fact that wind turbines now cost a relatively small fraction of what they cost 25 years ago is largely because we have built a lot of them since then. It is widely expected that their costs will fall further if, but only if, we go on building them. There is a formula that tends to link these things which has been empirically justified for a number of new technologies, although you can never be sure that what is going to happen in the future is the same as what happened in the past. If all countries were simply to say, "We are not going to invest in deploying any of these technologies; we are going to continue with the research and development", I am certain that the costs of these technologies would not come down and we would learn more and more about the technologies but you only get the cost reductions when you start building them in volume and you see what the problems about building them in volume and to scale are. This was a very important point in the White Paper: it is clear that there are a number of technologies out there which, over the long term, might prove to be technologies that could make a very great contribution. On the other hand, they might prove to be technologies that would not make a very great contribution and it is rather difficult for governments to decide on those technologies. I think there is a perception that wind can make a contribution at a reasonable cost and, broadly, that is a perception that I would share. Whether or not the marine renewables come to that position is much more problematic and difficult to judge. The Government has been much more cautious in the past and has only recently decided to fund its first demonstration project, which is a much larger scale than anything built before, in the hope that it will become apparent precisely what the potential for this technology might be. One is in a very similar situation with nuclear power, where there appear to be new generations of nuclear reactors on the horizon but they have not been built yet. As we know, especially with nuclear power which tends to be very capital intensive and, if you build one, people say you cannot stop at one; you have to build heaps of them, so you are making an enormous commitment up front, and cannot be sure that these hopes for cost reductions will be justified. Your question is a good one and governments need to choose. They cannot avoid trying to pick winners and if they pick winners they can be very pleased. What they must try not to do is pick losers and throw good money after bad once it has become apparent that that is what they are.

  Q407Lord Lawson of Blaby: In your written evidence that you submitted to us, you pointed out that the White Paper analysis, which you seem to accept—I am talking about the costs of achieving the 2050 target—is based on the MARKAL model. You say clearly that the results which emerge from such model runs are very dependent on input assumptions about costs and performance for the different technologies. That seems to be rather important. We have had evidence, for example, from Dr Helm who is a distinguished energy economist well known to you no doubt. In his book he says that the starting point is the old modelling adage, "Garbage in, garbage out." In evidence to us, he said he believes energy efficiency, while important, is very much more expensive than the Government imagined and wind farms are much more expensive than was perceived by the Government and therefore the true costs are likely to be very much greater. If it is so cheap, why has it not happened already in energy efficiency? As someone who was Secretary of State for Energy more than 20 years ago, propaganda about energy efficiency and energy efficiency campaigns of one kind or another have been going on since well before my time in office and yet very little has happened. Corporations are pretty shrewd at doing what is going to save them money and what is going to give them a good return. If they are not, prima facie, Dr Helm is likely to be right. As far as individuals are concerned, leaving aside corporations, even if it might be more efficient for individuals to run small cars rather than medium sized cars, that is not the end of the matter. You are going to have to bribe them very much more substantially than happens at the present time if you are going to have a significant change in behaviour. Do you believe that the costs of achieving this, even on the Government's figures, appear to be greater than the benefits that are going to accrue? The true costs are likely to be very much greater than the Government's figures.

  Professor Ekins: On MARKAL, it is one of the great strengths of MARKAL that it is a garbage in, garbage out model. All good models are garbage in, garbage out. The way you assess a model is: are the inputs garbage? Any model where you put in garbage and produce useful knowledge would be a very curious model indeed. It is not at all a criticism of MARKAL. It is a very good thing that it is a garbage in, garbage out model. In trying to answer your question, I then asked were the inputs to the MARKAL model on which the Energy White Paper estimates were based garbage. One needs to look at two aspects of that. For the central case, were the estimates about the availability of cost effective energy efficiency, the costs of wind power and other technologies best estimate assumptions within more or less the centre of the range that exists in the literature? My perception is, yes, by and large they were but there are more important questions than that. What sensitivity analysis has been done in order to vary those input assumptions? If you increase the costs of energy efficiency, if you increase the costs of wind power, if you reduce the rate at which learning reduces those costs in the future, if you change all those various inputs, what does that do to the outputs? As we have discovered, it changes them by a factor of four, which was quite a large factor, and that is how the MARKAL model generated that 0.5 to 2 per cent of GDP range of costs. The 2 per cent was the estimate of high costs coming out, because of these rather high assumptions which I looked at and which seemed to me to be very much at the high end of the plausible range, and therefore to be a reasonable, standard sensitivity analysis. That is why I have been broadly convinced by that particular kind of analysis. There is another reason why the MARKAL results might even be an overestimate. That is to do with the fact that it is quite a simple model. It is a simple, linear optimisation model which does not have any feedback at all between its outputs and its subsequent inputs. It takes energy demand as given. Even if you said that the energy prices increased substantially, that does not feed back into energy demand and reduce it, whereas every economist will know that that would be likely to happen, to some extent. MARKAL does not do that. It also does not allow the economy to adjust in any way. It does not allow less carbon-intensive, less energy-intensive sectors to grow faster because they are using less energy while the carbon-intensive sectors grow less fast. That is the difference in economics jargon, as I am sure you are aware, the difference between general equilibrium and partial equilibrium models. MARKAL is very much a partial equilibrium model with no feedbacks of this kind at all, and yet it is precisely feedbacks of this kind that tend to reduce the costs of adjustment to energy price increases. When prices change, things do not stay as they were. People do conserve energy. New technologies are developed which enable energy to be saved at lower cost. The MARKAL model has not captured any of that. I think those kinds of processes are likely to be important in reducing the costs of reducing climate change emissions over a period of about 45 years. The last issue is on efficiency and current costs. I am not aware of the White Paper having estimated a trajectory of costs between now and 2050. The numbers I have put in the paper here relate purely to 2050 which is quite a long time away. It is certainly possible that if we make substantial investments now in renewable energy, for example, this will bring prices down in the future so that by the time 2020 appears technologies which are currently not competitive will be competitive. By the time 2050 appears, especially if fossil fuel prices have increased in the interim, which does not seem unlikely on current form, these technologies become much more competitive than they would otherwise be. It is the costs in 2050 that the White Paper is seeking to arrive at. If by 2010 we are likely to be spending £1 billion a year on the renewables obligation, which is the National Audit Office's summation, that is clearly a large sum of money. If that is regarded as an investment in new technology and if that investment brings costs down in the future and enables energy to be generated more cheaply in the subsequent years of the decade, it is quite possible that those costs now which appear quite burdensome will be compatible with relatively low GDP costs, which are full general equilibrium costs, in 2050. I am aware I have used a lot of "ifs" but I am afraid there are a lot of "ifs" in this whole course of argument. The sequence of "ifs" I put forward are inherently no less plausible than another sequence of "ifs" which might arrive perhaps equally plausibly at a much higher estimate of costs, which is why economists such as Dieter Helm and myself disagree on these matters.

  Q408Lord Layard: Could I ask about the IPCC emissions scenarios exercise? Some of the witnesses have claimed there are serious shortcomings, for example, wrong exchange rates, rates of future economic growth that are inconsistent with past experience and arbitrary assumptions about convergence in per capita income in rich and poor countries. Could you tell us your views on the emissions scenarios exercise of the IPCC?

  Professor Ekins: I am going to be brief. I know it is a very complicated issue and I do not know as much about it as perhaps I know about other things. On scenarios generally, the issue is to be transparent about the assumptions. The future is inherently uncertain and by 2050 the future is very uncertain indeed. Simply because an assumption is arbitrary—lots of these assumptions are arbitrary—or uncertain or perhaps different from past experience, and we know the future is unlikely to be the same as the past, that does not necessarily mean that one should not pay any attention to what that scenario says. It is very important to be aware of those assumptions and if the assumptions are so inherently implausible that one is not prepared to accept them at all then one can discount that particular scenario and say, "We do not think that says very much that is interesting about the future state of the world." Very often, a scenario exercise which does try to stretch the bounds of what is currently thought to be feasible or possible can engender useful insights. It is a process of engendering useful insights rather than forecasting. Forecasting is a very different matter to scenario creation. As far as I am aware, the emissions scenarios that you are talking about were not intended to be forecasts. They were intended to outline a range of possible futures on the basis of certain assumptions some of which may, on the basis of present perceptions, be more plausible than others. I think they ought to be assessed on that basis but I do not propose to get into the detail of it because I know it is fiendishly complicated.

  Q409Lord MacDonald of Tradeston: I would like to ask about the process inside the IPCC and how it has been mutating. I am sure you would agree that it is desirable in academic as well as political life that received wisdom should always be questioned from a sceptical perspective. Some of our witnesses have suggested that the IPCC is mutating into a kind of consensus club where there is almost a self-interest amongst groups of academics, keeping the sense of alarm as high as possible. Among the scientists and economists involved, the sceptical views that might emerge get rather short shrift nowadays when they question the costs of control exceeding the benefits. They are not seriously entertained. Do you have an impression that this is the case in this process? I know in the UK we have our two government scientists, in the recent past Lord May and now Sir David King, both quite passionate on this subject, but do you get any sense that this sceptical view is not being considered seriously inside the UK Government?

  Professor Ekins: I am not part of the IPCC process for this assessment. In the past I have served in a very humble role as one of the many thousands of reviewers of some of its outputs. I do not get the impression that it is a closed club. At the same time, you are quite right. The consensus in science is a priori undesirable. On the other hand, we have to operate in a practical world. We cannot always be taking everything back to first principles. Science advances by people putting up hypotheses and seeking to disprove them. When, after a period of time, people have not managed to disprove a hypothesis and when it acquires greater and greater explanatory power, at some point the scientific community says that it does not make much sense to spend a lot of resource continuing to challenge that particular hypothesis. To take a ridiculous analogy, no one is going to fund anyone to try to prove that the world is flat any more, although this was clearly a very important scientific issue which was the subject of much debate in earlier times. The roundness of the earth is a hypothesis that is now routinely accepted. It is possible that climate change will attain that level of scientific consensus. I do not think it is there yet but it has become much more widely accepted among the climate modelling community over the last 15 years. I assume that is on the basis of the kind of evidence that they have been generating. I am not a climate scientist and I have not been able to assess that evidence for myself, but that is the impression I get. As an economist, I am interested in incentives. I think to myself: why might people want to believe certain things because, as we know, we can believe things sometimes because we want to as much as because the evidence says so. All of us would much rather not believe in climate change. I have never met anyone who thinks that climate change is a good thing. I know of lots of industrial interests which would much rather not believe in climate change and not be afflicted with things like climate change levies, climate change agreements, emissions trading schemes and all these other things. I know that some of these industrial interests have spent quite a lot of money and are spending quite a lot of money on the science of climate change in order to try to satisfy themselves about this issue. I also know that President Bush when he came to power was not convinced by the science of climate change so he asked his own National Academy of Sciences to do a complete review of this issue. I think he felt that his National Academy of Sciences would say that the IPCC was not telling the whole story, but the National Academy of Sciences came back and said that the IPCC was not doing such a bad job and the science did look pretty solid. I am aware of all of these things and, although I am not in the IPCC, I am fairly close to some of its processes, I suppose, and I have not picked up anything there that suggests that someone who came with a well founded, sceptical view would not find that view properly evaluated.

  Q410Lord Marsh: Most if not all of us have formed the impression that the economics of climate change focus very heavily on trying to avoid the potentially higher rates of warming, so-called mitigation. Until today, we have heard very little about adapting to climate change. Given the obvious problems of reducing rates of warming, should we not be focusing more on the technologies for that adaptation?

  Professor Ekins: I have always thought that both adaptation and mitigation were absolutely essential parts of any kind of response to climate change. It was not surprising that the early focus was much more on mitigation at least partly because there was very little idea as to what it was one would be adapting to. Should we refashion the Thames barrier to withstand one metre sea level rise, five metres sea level rise, 10 metres sea level rise? These are very important and not inexpensive questions to consider. It is not much good spending many hundreds of millions of pounds on fashioning it to withstand two metres sea level rise if we are faced with five because that is going to be a complete waste of money. There are real difficulties with making sound investments in adaptation. A lot of the time the kinds of adaptations we would make might not be technologies at all. I wonder why, for example, we continue to build on flood plains when the Environment Agency has been warning about the hazards of building on flood plains for a very long time. One knows that if one gets increased flooding these are precisely the houses which are going to be flooded. Sometimes it is social practices which will need to change in terms of adaptation as much as investing in technologies. It is absolutely right that we are considering these issues. The other issue which perhaps leads me to think that mitigation might be important is that in some parts of the world it is hard to think what kinds of adaptations they are going to engage in. In those small island states that might cease to exist altogether or very large river basins where a relatively low level of sea level rise will inundate very large areas of land, it is not clear to me that either they possess the resources to adapt to that sea level rise or that anyone is moving in there and helping Bangladesh raise the level of land round the Ganges delta. It is right and proper that both those elements should be strongly represented in any policy towards climate change but I think it is most undesirable for a focus on adaptation to say that we do not need to bother about mitigation because we can ride the storm. I am not sure we yet know the full extent of the storm that we are seeking to ride.

  Q411Lord Marsh: Some of these things—nuclear power is a classic example—will have very long lead times. At the moment, the Government does not seem to take any particular interest in what you are doing for the future. They are still talking about windmills because windmills seem to be the fashion at the moment but other ways of doing this like nuclear power, for example, they are keeping under close and constant review.

  Professor Ekins: Yes indeed. Nuclear power is a possible mitigation option which needs to be kept under close review and perhaps at some point needs to have a much more forceful push behind it. I think an initial attempt to see whether renewable energy technologies could be got off the starting block through much more forceful promotion than we have seen in the past strikes me as a reasonable approach. In a couple of years we will know whether the most promising of those technologies on a mass scale, wind, really has very much to offer. I hope we will know a little more about what the next generation of nuclear technologies has to offer because there are enormous numbers of questions that still need very great assessment in that area. I do not think the previous nuclear programme was particularly successful in economic terms or in public acceptability terms. I agree with Dr Helm on that particular point. Any government that wants to seriously investigate that option for the future would do well to proceed cautiously, taking into account and trying to make as transparent as possible the economic issues while at the same time engaging in the kind of open, public debate which will be necessary if people are to be reassured that this technology will perform better next time round than it did last time.

  Q412Chairman: What would your advice to the Government or to us be about the future of the nuclear industry? Are you saying wait and see whether other renewables are taking place? You only have to look at the debates in the House of Lords; there is no question where a large number of people in the House of Lords stand on this. We believe the Government does not do as much as it should be doing at this present time in making sure that the nuclear option is a real option. I wondered where you stood in that debate.

  Professor Ekins: I do not think it is realistic to imagine it will do anything now, this side of the election. After the election, it might be a little more realistic. I think the Government has a duty to ensure that it has as many shots in the locker as it can. I do not think enough is going on in terms of assessment of what the new nuclear programme might look like, how much it would cost, what sorts of technologies it might employ; would they be the same technologies as the ones we have or would we be going into new prototypes which have not yet been built? If so, how might they be built, who would build them, how would nuclear insert itself into the current market structure that we currently find; what will the generators who are not nuclear generators at the moment—we only have one nuclear generator—feel about a new technology coming in which they would not be part of, obviously, because one cannot imagine that the new nuclear programme will be built by anything except a special consortium put together for that process, to roll out large numbers of power stations one after the other. There is a huge number of questions that need to be answered about the nature, shape, cost and details of a new nuclear programme. My fear is, when I read in some of the Sunday papers that one of the first actions of the new Prime Minister, whoever he or she might be, would be to tender for an eight billion nuclear programme within a year, that to me would be extremely premature.

  Q413Chairman: We can all forecast what future Prime Ministers might do. If the Prime Minister was to ask you after the election what he should be doing in this area, the answer you gave gave me the impression that you would say, "This is something the government ought to be engaged in."

  Professor Ekins: Yes. In terms of assessment I think that is absolutely right, but absolutely open assessment. It is still very much an open question whether a new generation of nuclear power stations is indeed the best response we can make to carbon mitigation. It is in that spirit of inquiry that we ought to be looking at the possibilities of a new generation of nuclear power stations.

  Q414Lord MacDonald of Tradeston: On the reports that the Chinese have new prototypes which would be cheaper, safer and have less dangerous byproducts, we should be sceptical? They are premature, are they?

  Professor Ekins: I do not know of the reports that you are talking about but everything I know about the nuclear industry in this country over the last 30 or 40 years makes me sceptical about it. I would like to see costs; I would like to see safety data; I would like to see issues of waste laid out in a much more transparent way than we have had in the past so that independent analysts can assess them and arrive at independent conclusions about whether these benefits are as great as people say. I am not aware that anyone has been able to do that to these Chinese reactors.

  Q415Lord Sheppard of Didgemere: Earlier on, you mentioned the process of discounting, looking at costs and benefits. We also touched on an attempt to measure some of the emissions involved, present and future. Can you elaborate some of your views on discounting? Is it something where environmentalists would say that economists by discounting back understated the true impact from a cost point of view of climate change and so on? Do you think that is true? The Treasury would have their 3.5 per cent normal standard, but on long term projects and even short term projects like building Crossrail in the next 100 years, they are now using smaller numbers on the long term costs and so on which probably mitigates some of those distortions. Do you want to comment generally on the use by economists of discounting?

  Professor Ekins: Yes. For me, discounting is a tool. Any positive discount rate will result in future costs and benefits being given a lower value at present than their nominal value in the future. One has to ask why might one consider that that is a reasonable thing to do. Where the discount rate is related to the interest rate—in other words, you are making an investment which you could otherwise have invested elsewhere so that it would grow—you would expect a present value to be lower than a future value because of the value of interest. That is not the way in which the discount rate, as I understand it, has been calculated for these particular issues. It has two elements. One is something called the social rate of time preference, which is the extent to which people would naturally rather have something now than later, whether that is due to impatience, risk aversion or whatever. There is a second element which relates to whether people in the future are going to be richer than they are now or not. On the basis of a well established economic assumption, the richer people are, the less they value any given increment of income. If people are going to be richer, a given sum of money in the future is going to be worth less to them now. That is the way in which that 3.5 per cent has been put together, I guess broadly, probably, the social rate of time preference 1 per cent and the rate of economic growth element 2.5 per cent, although I am not entirely familiar with the way that has been constructed. You then have to say, "Is that appropriate in this particular context?" One might say that what people feel about the impatience for their own particular consumption now should have little relevance to whether people in the future experience a stable climate or not. That kind of social rate of time preference might be appropriate when we are thinking about our own consumption as between the present and the future, but might not be appropriate for inter-generational decisions of that kind. One might question whether one ought to be gambling in discounting the future on the fact that future generations will be richer than we are. What happens if they turn out not to be? What happens if they turn out to be poorer than we are? Surely that is a possibility. We all hope it will not be the case but then we will have engaged in producing benefits for ourselves and generating costs for them at a time when they value those costs rather more than we value them at present. These are some of the very difficult issues which arise when one uses discount rates. Again, reasonable people differ about the conclusions that you need to come to on the use of discount rates of that kind. The great difficulty is that if you do not use positive discount rates but you have an infinite stream of costs or benefits in the future, you cannot arrive at any kind of cost benefit balance because you get infinity on one side of the equation. That factor itself, the desire to arrive at some kind of balance, provides quite a lot of the impetus for saying that there must be a positive discount rate in there somewhere.

  Q416Lord Lawson of Blaby: I am sure you are absolutely right to be sceptical about breakthroughs in nuclear technology but they happen from time to time. The important point that Lord MacDonald was making was that they do not have to happen here. It would be nice if they did but it would not matter if the breakthrough was made in China, the United States or wherever. If there was this breakthrough, it would change the equation.

  Professor Ekins: I quite agree and we must profoundly hope there will be breakthroughs somewhere in something.

  Q417Lord Lawson of Blaby: On the cost benefit point, one of the things that makes some of us a little uneasy is that when it comes to the costs of mitigation, as Dr Helm points out, extremely optimistic estimates are made by the Government in the White Paper and by the DTI about the evolution of the costs of the policies that they are pursuing, renewables and energy efficiency, that the costs are going to come down and down and in particular the innovation in technical progress is going to make a big, favourable difference. That might be true but it might not. The tendency is when they are looking at these is to engage in a certain amount of wishful thinking. It is not inconceivable but it is within the range; whereas we are told by the climate change scientists and all that lobby of which you are not one that the precautionary principle demands that we look towards the worst possible scenario. There seems to be a certain imbalance.

  Professor Ekins: On the first point I am not sure I quite agree with the premise in the sense that I do not think the government estimates on the cost of mitigation are out of line with those from many other international studies.

  Q418Lord Lawson of Blaby: You disagree profoundly with Dr Helm on that?

  Professor Ekins: I do, yes. I have looked at a paper which has looked at a hundred and something studies and plotted what they think about costs and benefits. There are some which postulate much larger costs than the 2 per cent GDP which was the upper end of the DTI range, but the great majority are in that range of about nought to two. That is another very important issue. Just because something is within or outside a range does not mean it is right or wrong necessarily because one has to assess it on its own merits. The fact is that the government estimate is not way out of line with the majority of studies in this field. Therefore, if one says that it is extreme in some way, one has to provide evidence for that which I have not yet come across. On the imbalance, I do not think it is true that a best case estimate necessarily has been looked at for the costs here. It is a reasonable range of costs that has been analysed. Probably in public policy terms it is reasonable to assess some things according to worst case scenarios; whereas other things you assess according to best guesses. I am very struck that in defence matters, for example, Ministry of Defence planners very often are asked to come up with worst case scenarios. During the time of the cold war when people were spending very large sums of money on weaponry, you often read about worst case scenarios and the need for countries to be prepared to counter those. You may see something similar going on in the terrorism issue at the moment whereby worst case scenarios are put forward and measures are then put in place that seek to counter those. It may or may not be the case that climate change ought to be one such issue, given the potential magnitude of some of its effects, but I think that is at least an open question.

  Q419Lord Lawson of Blaby: Even in the case of terrorism there are those who have argued that one should not base one's policy on an absolute worst case scenario.

  Professor Ekins: Absolutely.


 
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