Examination of Witnesses (Question Numbers
164-179)
Mr Phil Woolas and Mr Niall Mackenzie
9 JULY 2008
Q164
Chairman:
This is a formal evidence-taking session, so there
will be a transcript and you will get a copy, and you will be
able to see whether there have been any errors, mistakes, slips,
or, dare I say it, second-thoughts. Also, we are being webcast,
so there is a slight possibility that somewhere someone may actually
be listening to this! What would you like to do, Minister? Would
you like to start off with an opening statement or go straight
into Q and A?
Mr Woolas: Can I just
very briefly thank you for the invitation. It is a good opportunity
for us to put our policies forward. Niall Mackenzie is the Head
of the Climate Change and Environment, Europe, Division, and he
gave evidence previously to you, and you will forgive me if I
rely on his expertise to answer the difficult questions. I will
try the easy ones! Just to say, of course, that the Emissions
Trading Scheme within the wider United Kingdom climate change
policy is of huge importance. I would say it is the keystone of
our policy, because obviously as part of the United Nations process
and we rely upon European Union solidarity (if I can use that
word) to promote the cap-and-trade policy as opposed to the pledge
and review policy. Therefore, for huge international reasons,
in achieving a low carbon global economy, not just a low carbon
UK economy, the ETS is the keystone, so getting it right is of
huge importance. I have to say, Chairman, that that is disproportionate
to the column inches it commands in the newspapers, for the reasons
which I suppose are obvious. So it is extremely important. We
welcome the Commission's publication of the climate change and
energy package of proposals on 23 January 2008 and, as you know,
our policy is based on those building blocks. So it is just really
to put on the record how important we see the operation of the
Emissions Trading Scheme being.
Q165 Chairman: Thank you very much. Can
we have a look at this business of certainty, because a lot of
the witnesses we have seen over the past couple of weeks or so
have attached great importance to the scheme having a degree of
certainty, mainly because obviously there is a requirement to
put in significant levels of investment and they are not going
to do that, or they would find it difficult to do that unless
there is certainty as to the level they are being asked to reach.
I suppose the difficulty is that the 20 per cent, 30 per cent,
is dependent upon having an international agreement, which itself
causes a degree of uncertainty. So there is a bit of tension there.
Do you consider that the degree of certainty which emitters face
at the moment is sufficient to enable them to get on with the
job?
Mr Woolas: I think in terms of certainty
where we can provide certainty, and are keen to do so, is in timetables
so that the markets know what periods we are talking about. The
key one, of course, is the post-Kyoto period. We have argued very
strenuously in international fora that the Copenhagen deadline
of December 2009 is critically important to give time between
hopefully, touch wood, that agreement, and the start of the post-Kyoto
period 2013. The difficulty we have had is that most countries
assume that that period is required for parliamentary or legislative
ratification, and one typically looks at the Senate as being the
biggest hurdle to jump given past experience. For us that is important,
but what is equally important is giving businesses certainty.
Then we come to the question you have asked, how can we possibly
give certainty if we do not know there is going to be an agreement,
if it is 20 per cent or if it is 30 per cent? We think the importance
of putting our policies—and we support the European Union
policy in this regard—into the framework of the Bali road
map is the critical point, and in that sense we have got no choice
in actual fact. So we can provide stability in the markets, knowing
when decisions will be taken, but the big uncertainty, of course,
is 20 per cent or 30 per cent.
Q166 Chairman: The nice side of uncertainty
is flexibility.
Mr Woolas: Yes, it is.
Q167 Chairman: I suppose the question
there is, in the lead up to Copenhagen what degree of flexibility
do you need in the ETS to give room to negotiate an international
agreement?
Mr Woolas: Most of all, we need to show
that the ETS is working, and the strongest card we have in the
discussions is that it is working from the point of view of it
being a proven mechanism to reduce real levels of emissions within
the European Union countries and also as a deliverer of a finance
flow for countries outside, the developing countries obviously,
as a real finance flow to again show genuine emissions. The international
debate is the mirror image of the debate here, where developing
countries are keen on overseas funding, obviously, through the
Clean Development Mechanism and potentially others, whereas the
argument here from the NGOs tends to be, "Don't salve your
conscience by spending money overseas." Well, I have never
had an environment minister in the developing countries say to
me, "Please, Phil, don't spend any money here." The
opposite is the case. Can we show that it is working in those
two criteria I have outlined? I would say that is the most important
card in our negotiation package, which does not really answer
your question but it puts it into context, I hope.
Q168 Chairman: One of the arguments which
have been put to us is that really the EU will sign up to anything,
with Copenhagen it desperately needs an international deal, and
that when that comes back it will seem to be a deal which really
unravels and is not as copper-bottomed as it should be, and our
domestic emitters will be in the position where they are expected
to go to 30 per cent but really the strength of that international
deal is weakened.
Mr Woolas: That is one of the biggest
questions facing us, especially in light of the reports from Japan.
It is a good question. I can only give you my personal view. There
is not an HMG line to take on this. We are living under, I fear,
a false sense of security in the United Kingdom. The mainstream
political parties support ambitious targets mid-term and long-term
for global and domestic emissions reductions. The argument which
is prevalent in the United States of America in the public debate
is, "Why should we cut, if China isn't?" That is a caricature,
but that is basically what it boils down to. There is a substantial
number of people, we know from our research and from common sense,
in this country who share that view but that view is not given
full expression because the three main political parties, and
indeed the parties in Scotland, Wales and Northern Ireland, also
share that ambition. If an agreement is reached which is perceived
to be too harsh on the developed countries, although common, differentiated
nevertheless, without commitments from the developing countries,
it will be difficult, particularly in the potential economic circumstances
which we may be in, to hold public opinion and business with us.
That is what I worry about in the negotiations. I think we take
it for granted too much that we can bring the public and businesses
with us. We have to, therefore, be able to show by mid next year,
more so than we are at the moment, that Lord Stern's point (which
says you can have economic growth and falling emissions) is proven,
is the paradigm that business is in, that we see a UK competitive
advantage for our industries as a result of that investment, that
pathway forward, so that the argument we put which says having
a low carbon pathway is not only the right environmental policy
but is the right economic policy is proven to have weight. That,
in my judgment, is the only way we will carry the momentum through,
remembering that there will be an election in the offing, depending
on the timing, in this country, when I am sure the newspapers
will put things into very sharp focus indeed, as is their right
and their want.
Q169 Lord Brooke of Alverthorpe: Good
afternoon, Minister. Do you perceive similar problems in other
European countries, that there may be a mismatch between what
the political ambitions may be amongst the political classes and
what is actually deliverable?
Mr Woolas: If I can speak very honestly
and frankly to this Committee, of course conversations take place
about climate change fatigue. There is that point. Again, of course,
it matters what happens in the United States of America, and again
I fear that there is a level of naivety in the public debate about
the US. It is true that the two main presidential candidates have
stated policies which are more akin to European Union policies,
such as cap-and-trade policies, but the public debate forgets
that the Congress and the Senate have got to ratify any agreement
and it is not a given that they will do that. So I do think that
unless we can show that we have decoupled, that the prosperity
growth path is the low carbon growth path, I think the politics
of it get very difficult indeed. So the answer is, yes.
Q170 Lord Brooke of Alverthorpe: If I
may quickly follow up then, coming back to Lord Stern's report
and the importance of growth, what are the prospects for Copenhagen
next year if in fact the current economic problems continue or
even perhaps worsen so that we do not have growth?
Mr Woolas: Again, I said that the ETS
was the keystone of our policy, and it is, but the end, as opposed
to the means, is to show exactly that. We have had economic growth
since 1997 of 27 per cent, I think, and emissions reductions on
greenhouse gases of just under seven per cent. One of the reasons
why the United Kingdom's standing is high—without blowing
my own trumpet, it is nothing to do with me, it is very high largely
because of our scientific reputation and our diplomatic service—is
because one of our strongest cards and the reason why we carry
such respect is that we can show that we have decoupled those
two growth paths. To be able to show that we can carry on doing
that and that the ETS is a means to that end is critical. If we
are not able to show that, then I fear that we will not get an
agreement.
Chairman: We have more on this from Lord
Cameron.
Q171 Lord Cameron of Dillington: Minister,
you mentioned that we are aspiring to a low carbon global economy
and you also mentioned the fact that both presidential candidates
seem to be heading towards some sort of USA equivalent scheme.
How much work have either we or the European Commission done to
ensure that our proposed third phase is going to be compatible
with the US scheme so that it does work on a global basis? Do
you know?
Mr Woolas: I know that the answer to
the question is, huge, and I know I have never been asked that
question before in my twelve months as a minister.
Q172 Lord Cameron of Dillington: Perhaps
Mr Mackenzie can have a go!
Mr Woolas: I think that is one of the
most important questions facing us in the future of our global
economy. The Foreign and Commonwealth Office, with whom we work,
as I hope you know, very closely in this, have given significant
priority to the whole area of climate change, the Bali road map
(as it is called for shorthand). Within that, with our own experts
in Defra and with others in the United Kingdom, and of course
in the European Union, where the amount of shared expertise is
growing, I would say that in my limited experience this is the
area where European Union close cooperation works to greatest
effect, particularly as we have Poland and Denmark in the presidency
of the COP this year and next year. The use of that diplomatic
effort and the expertise we have to help overseas countries develop
carbon markets is based partly on the premise that for our scheme
to be the most successful it needs interchangeable schemes overseas.
The United States has been at the forefront of that, the individual
states, which I know you have looked at, the Canadian provinces.
We feel now that we have got a snowball going. The tipping point
was the Australian election, but the Korean Government elected
in December has started the research on a cap-and-trade carbon
market. Our Embassy is advising them. Our own officials are involved.
I think there are Royal visits planned. There is a huge UK effort.
The Japanese, most pleasingly, have now set out looking at carbon
cap-and-trade emissions trading policies, whereas that had not
been their policy position. The New Zealanders were keen to promote
it to other countries. The answer to your question is that that
effort has to be such that there is interoperability and interchange
between the carbon markets. We are trying to create a world currency
and my own view is that if we are successful, touch wood, in ten
years' time that will be a genuine world currency based on the
price of carbon with interoperability, which of course is why
verification, monitoring and reporting at an internationally agreed
standard as part of the UN agreement, with the City of London
as a key provider of that service, is a tremendous opportunity
for this country and I can report to you that we have good cross-party
consensus in this country on that and that is very exciting.
Q173 Lord Cameron of Dillington: It is
very good to hear that kind of philosophy. I do not know whether
Mr Mackenzie would like to put a bit of flesh on that?
Mr Woolas: Whether it is actually working
or not is a fair question.
Q174 Lord Cameron of Dillington: What
is actually happening in terms of setting criteria which are going
to fit with other schemes?
Mr Mackenzie: As the Minister has made
clear, we have a lot of contact with the Americans, and indeed
with other countries, and barely a week goes by when we do not
have a delegation from Japan! Phase one of the Emissions Trading
Scheme is very much learning by doing, so there is quite a powerful
message to give to other countries about how we have done it,
what mistakes we have made and what things we did quite well.
Certainly, the evidence from both Australia and America in the
schemes which are starting up there is that they are following
very much our philosophy and way of doing it. For example, we
had no option on allowances in phase 1. We were limited to a ten
per cent option by the directive in phase 2 for 2008-12, whereas
America, in its regional greenhouse gas initiative, has gone for
very much higher levels of options from the start. I should know
the figure, but I am afraid I cannot remember it. It might even
be 100 per cent. It is quite a large number, so they have assumed
that they are issues which they can address. In terms of how to
link with Europe, both we and the Commission are talking to the
Americans and others, but until there is an American federal scheme
and an Australian scheme in operation it is hard to work out the
mechanics. So the changes to the directive which are being proposed
actually provide a legal framework to make that linking and we
are consulting in our consultation paper about criteria which
we should make as part of a political judgment and technical judgment
about whether we join. The Minister has already referred to them,
things like proper monitoring, reporting and verification, but
when we have a scheme to link with there will necessarily be technical
issues which we will have to resolve, and it may well be an interim
means, using something like CDM as the common currency which provides
the oil throughout the globe. So if we allow Kyoto credits into
the European scheme, the Americans allow it into their scheme,
if the schemes are not identical to begin with that provides the
oil between the two systems, which will give the market something
to reduce costs, pending aligning the two systems, because changes
will probably be required on both, depending on where the Americans
have got to. But until the Americans have decided what their system
is, it is impossible to say with absolute certainty, "Oh,
it is a matter of a few weeks to make the two systems link,"
or it is six months or a year. But all the global schemes which
are being talked about are based on some of the same principles,
which makes it easier issuing allowances and surrendering allowances
at the end of each reporting period. Obviously, it was the Americans
who put the whole idea of carbon trading into Kyoto in the first
place and they have got a lot of experience from trading sulphur
and other gases. So the technicalities will be worked out in due
course, but the framework is already in place, or will be in place
when the directive is approved.
Q175 Lord Cameron of Dillington: Would
you like to comment on the effectiveness of the International
Carbon Action Partnership?
Mr Mackenzie: It has only just started.
It is effective. It is very good to have a forum where those who
are interested in carbon trading can exchange experience and learn
lessons. I think part of the enthusiasm for it is that it helps
the American federal government realise just how much understanding
and experience there is around the world, that you do not have
to reinvent things from scratch, and there will be issues that
we learn from the Americans as well. As I say, they are going
for quite high levels of options in their original greenhouse
gas initiative. That may have implications for how we run our
options in phase three.
Q176 Lord Cameron of Dillington: Moving
on, Minister, you were talking about CDMs being the other international
aspect of this scheme. We have had some representation saying
that the EU's proposals on the use of CDMs are excessively restrictive.
At the same time the whole of the CDM process has been pilloried
a little bit in the press as being sending money into developing
worlds, which probably they should be doing anyway, and would
be doing anyway if it was not for the CDM process and it is not
really achieving anything very much. I was just wondering where
the UK stood in that range of views.
Mr Woolas: There is a lot of cynicism
on this issue which I think is unfortunate. It is right to be
robust, perhaps it is right to be sceptical, but it is probably
the only show in town in terms of the scales of money which the
developing world needs given that public sector money could never
fund the issue. The second point, to answer the cynics although
not the sceptics, is that it is early days. It is very early days.
I remember studying the formation of the Stock Exchange and when
we first formed it, it did not work. Now my colleagues in Defra
and elsewhere are doing their best to make it work and we published
a paper recently on improvements to the CDM, which we have circulated
to other countries, which I think provides some very strong lessons
forward. On the detail, Chairman, maybe Niall can add to that.
Mr Mackenzie: The only thing I would
add, if it is helpful, is that people assert that it would not
be happening, or it would be happening anyway but there is no
real evidence, and particularly in some countries which have expressed
themselves sceptical about climate change there is no reason on
earth why they should install equipment to reduce emissions if
there is no political pressure or public debate in that country
saying they should do something about it. Whereas, if they are
given a financial incentive then change happens and emissions
are reduced. You would then have a debate as to whether it is
value for money. That is a much better debate to be having, whether
we are doing it in the best and most economically efficient way
possible rather than whether or not we should have it. I think
that is the main benefit of CDM, making things happen. There is
always room for improvement and we are working on that through
the UN process, but those who point out the faults take for granted
now the behaviour change which CDM has driven.
Q177 Lord Cameron of Dillington: So you
will be working within Europe to try to make them relax their
approach to CDMs, will you?
Mr Mackenzie: As I think I may have said
last week, we are genuinely open and consulting on this as part
of the consultation exercise and the Emissions Trading Scheme
is concerned. Some industry and some Member States are saying
the limits in the Commission's proposal are too tough, others
are saying they are too lax, and indeed the MEP who is the rapporteur
for greenhouse gas said that there should be no access to CDM
in the non-traded sector, so that is very important and very tight.
It is an issue we are looking at and we have yet to put consolidated
advice to ministers yet.
Chairman: Thank you. Let us turn to the
thorny question of carbon leakage.
Q178 Lord Brooke of Alverthorpe: Mr Woolas,
one of the more politically sensitive issues surrounding the revised
ATS is that of carbon leakage and the Commission has suggested
that "border adjustment measures" (in short tariffs)
on imports might be an alternative policy approach to that of
awarding free allowances to the EU sectors identified as being
at risk from carbon leakage. Could you give us your views, please,
on this alternative policy approach? Does it appeal to HMG?
Mr Woolas: No. We think it is folly.
The best way forward is to have a level playing field for competition,
to identify where there are existing tariffs, directly or indirectly,
on goods and services. The major economies meeting at Korea three
weeks ago, which drafted the leader's statement, was clear on
that point. There was an argument about it, but it is the best
way forward, we think. Again, there is a mirror image debate in
the United States which sometimes comes from a different political
persuasion. They are sometimes surprised that we are so strongly
against tariffs. We are trying to make this market work. As you
know, our experience is that tariffs are not likely to be the
best way to achieve the emissions goals. The global climate agreement,
of course, is necessary, in Copenhagen. We want to make sure that
that includes the level playing field. As regards those who say
we should put up tariffs as an incentive for others to support
an ambitious target internationally, our view is that that is
a miscalculation.
Q179 Lord Brooke of Alverthorpe: On the
same subject, your officials indicated to us last week that the
Government is still formulating its policy on the criteria which
should be used to assess whether a sector is at risk from carbon
leakage. What position will you be defending in the Council with
respect to the criteria which is being proposed by the Commission,
and can you give us an indication of the sectors which would be
susceptible to carbon leakage according to the research you have
commissioned? I would like to thank Mr Mackenzie for sending us
some supplementary material along with the printed report last
week.
Mr Woolas: I will do my best, but I will
need help. It says here that we are seeking to refine the criteria!
We have got a number of policy objectives. We have got UK plc,
number one concern. How do we ensure that the regime achieves
emissions reductions and gives UK plc a competitive advantage,
where that is possible? If you look at our own emissions, of course
steel is critical, but there are different methods of producing
steel. That is not understood in the debates, so we are trying
to bring some realism into that. There is the thorny question
of aluminium, which is a policy developing as we speak, I think.
Interestingly, in our own economy, food processing is a major
emitter and of course the transferability, the potential for carbon
leakage, is probably less in food processing. I have missed one
out, have I not?
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