Examination of Witnesses (Question Numbers
220-239)
Dr Terry Barker and MS
ANNELA ANGER
8 OCTOBER 2008
Q220 Chairman: Is there not also a danger,
because of the complexity of the emissions trading scheme, that
lurking somewhere within it there are opportunities for perversities?
Dr Barker: Of course and then these are
eagerly sought because these can often give rise to large profits.
If I may, let me give you an example of the foolishness of some
of this behaviour. We are now approaching a global depression
on an unprecedented scale; this will almost certainly mean that
the emissions will go down—the emissions that are covered
by the trading scheme—and then in turn, because the targets
are so weak, this 20%, 30% stuff, it is quite likely that the
carbon price will go to nothing and there will not be any profits
to distribute, so they will have been fighting over nothing. Another
example is that one of the weakest aspects of the current Phase
Two emissions trading scheme is the fact that there is very little
flexibility, particularly in the proportion of the allowances
which are auctioned. If there had just been one paragraph, perhaps
even a sentence, even a word perhaps in the legislation that national
governments could change this from 10% to 30%, it would not have
been necessary for all of this stuff about extra profits tax on
the electricity companies, the chancellor need have just said
we will raise the amount of auctions from 10% to 30% or 50%, and
then could have raised all the money and used it to decarbonise
the UK housing stock. It is as bad as that, tiny little decisions
on flexibility can have huge effects on welfare basically, national
welfare.
Chairman: We need to press on. Lord Palmer on price
signals.
Q221 Lord Palmer: You take the view
that the proposed cap on emissions in the third phase of the ETS
is not stringent enough, and that the carbon price—and we
touched on this earlier—will therefore not be high enough
to send the necessary price signal to private actors. Could you
be kind and try to explain to us what the impact of an insufficiently
high carbon price would be, for example on infrastructure, investment
and technological innovation? We all know how volatile fuel prices
are, particularly at the moment, and how would the level of fuel
prices play into these decisions? In your view, what would be
the appropriate range for the price of carbon, and would you regard
price floors/ceilings as desirable or indeed necessary?
Dr Barker: That is a very complicated
question and I would like to take it in parts if I may. If you
could remind me of the different parts, let us start off with
the 20%-30%. I have published many papers on why that target is
too weak: it will not achieve the two degrees, I do not think
it will even achieve the government's targets for CO2 reduction
of 50%, I believe, below 1990 levels or 2000 levels by 2050. I
do not think it is going to achieve the British Government's targets,
I do not think it is going to achieve the European Union's ostensible
target, this two degrees. There is lots of literature on this,
it is not as if we have not had a fourth assessment report crawling
over all this literature and coming up with a summary for policymakers
which is quite clear about this. I have been going around the
world giving presentations about this very issue, saying that
to get to the two degree target we have to be much more stringent.
I have now raised my level of what stringent should be from previously
30% to 40%, but with this ongoing recession and depression—very
likely depression—it should be more like 40% and 50% by
2020. I can explain the reasons for that: because I think the
UK economy, the European economy and the global economy would
greatly benefit from such a target. It would be difficult to find
where the losers are, though there will be some losers I expect.
Basically, as a global macro-economist working for 10 years on
this work, having a large scale model and a team of people behind
me, that is the view I take.
Q222 Lord Palmer: Where are most
of the losers? Which particular sector would you envisage them
to come from or would it be across the board?
Dr Barker: No, not across the board.
The losers are quite specifically concentrated in the coal industry,
particularly the employment intensive coal industries in China
and India. In this country and in Europe, if the subsidies which
are at present used for the coal industry in Europe were just
given to the miners whose jobs are being supported, they would
become very rich and the coal industry would die, but I suspect
the profits would not. Maybe there are losses of profits in the
large coal owners; basically it is the coal industry. The losses
are extremely specific so far as carbon trading and emissions
trading are concerned, they are located in the carbon intensive
industries and in the few energy intensive industries. If we are
talking about unilateral action—which I think you are talking
about, but I could be wrong—there are some specific companies
who are on the brink of going bankrupt who could be pushed over
the edge because of the emissions trading scheme. But that would
be the way the market works, these are relative prices that we
are talking about and when relative prices shift markets should
work. When companies are going bankrupt, like the banks, the markets
work by letting them go bankrupt, and it is interference with
the market to stop that happening. It slows the market processes
and it is very, very serious at the moment, all the government
interference with these markets, because banks ought to be going
bankrupt but they are being stopped.
Q223 Lord Cameron of Dillington:
Could I pick you up for a moment on what you have written here,
and this is just an example. You say that the electricity sector
has the lowest cost options for reducing emissions, since coal-fired
plant can be replaced by gas-fired plant in many Member States.
I find that quite a kind of simplistic statement. Correct me if
I am wrong, but it is actually quite expensive to change from
coal-fired—you have a whole infrastructure around it, you
have to get planning permission and it would take years in this
country at the moment, before the Planning Bill comes through
it would take years and years to change. Okay, the construction
of new power stations is going to boost the economy but it is
going to be very expensive for the electricity generating sector,
and I have a feeling that you are being slightly simplistic about
the losers and the winners in this whole scenario.
Dr Barker: It differs according to the
Member States and according to particular companies, and it is
very complex, you are absolutely right. There are large amounts
of money involved in investment but many of the coal-fired stations
are reaching—have reached or have exceeded—their optimum
life and they are being kept going because of perversities in
the market or in the rules which allow things to happen that should
not happen. There is, therefore, a lot of obsolete plant around
which is being pushed beyond its life and is being kept going
because the owners of the plant can make large amounts of money
out of the emissions trading system.
Q224 Lord Cameron of Dillington:
It is not only that, getting gas from Russia for instance, which
is the only option available, is quite a difficult option to go
for in terms of your nation's power.
Dr Barker: The gas from Russia issue
has been greatly hyped up by the nuclear lobby; I do not think
that is an issue at all really. We are busy building large infrastructure
projects to bring in liquefied natural gas, largely from the Middle
East but it comes from many other parts of the world, and this
is going to solve the gas problem as far as the UK is concerned.
Q225 Lord Cameron of Dillington:
At great expense, yes.
Dr Barker: This is a market-led expense,
there are no subsidies as far as I know going into building these
liquefied natural gas depots so it is not a great expense to the
taxpayer, that is what these companies do at great expense and
what they ought to do, but I am not sure that I have answered
your question.
Q226 Lord Cameron of Dillington:
My point is that actually all those expenses will be passed on
to the consumer eventually and to small businesses. I just think
it is going to have a wider economic effect than you are purporting,
it seems to me, to be making out.
Dr Barker: Yes, indeed, the increase
in electricity prices brought about by the emissions trading is
largely passed on to the consumer and some of it is more than
passed on to the consumer the way the market operates, in that
the companies make even more money, that is the case. I am still
not quite sure that I have answered your question.
Q227 Lord Cameron of Dillington:
My point is I think you are minimising the actual costs of the
changes that are necessary. You are saying that a lot of people
are making profits, but actually the downsides are very limited,
I do not agree with you.
Dr Barker: There are benefits; let me
list the benefits to offset the costs you are thinking about.
The benefits are the development of alternative technologies.
You mentioned gas and there are obviously good gas technologies
to be developed. Those benefits then translate into export markets
for European producers—I can give you examples of many export
markets which have been developed from such benefits, in particular
Danish wind power is exported all over the world and has been
a great success for the Danish economy; the German economy has
benefited from major developments of technology in Germany, in
the kind of low carbon technologies which this country could have
developed if it were not for the nuclear lobby and the coal lobby
I suppose—and the gas lobby and the electricity lobby.
Q228 Chairman: That is fairly comprehensive.
Dr Barker: I have not finished answering
Lord Palmer's question; I started with the target.
Q229 Lord Palmer: If you could try
to explain to us what the impact of an insufficiently high carbon
price would be on infrastructure investment and technological
innovation.
Dr Barker: It would be less. I do not
know how linear or not the relationship is but the lower the carbon
price the weaker the response in the economy. I would say that
it is highly non-linear; if there is a zero price then it makes
a huge difference if there is even a €3 per tonne CO2 price,
so there is a big non-linearity between zero and any price at
all, it is just that if you have to pay for something you start
thinking about it, but then when you go up and up and up and the
price gets higher and higher and higher—it is very interesting
this—this appears to impose a cost, but that is not the
case and it is not the case because the cost is there and it is
the kind of costs that Lord Cameron was talking about; they are
the costs to particularly the electricity system. This a scheme
which affects a very small part of the economy; electricity is
about 4 per cent—this is off the top of my head but we can
correct it—a very small part of the economy, and it is that
part of the economy that faces the costs. We ought to look at
exactly what these costs are—they are investment in renewables,
they are investment in low carbon technologies of one sort or
another. These are also benefits to other bits of the economy,
the bits that are producing this equipment, that are developing
export markets with this equipment and are employed to build this
equipment and install it. Now we are getting a wider picture of
the macro economy, but this picture can be widened even further
when we are talking about the cost because the emissions trading
scheme yields very large amounts of revenue potentially—if
the allowances are auctioned—and those revenues can be used
to benefit the economy. They can be used to accelerate this technological
change and make Europe more technologically advanced and more
leading the world. It has already taken the political lead and
Germany already has a great advantage in terms of its technological
lead—Germany is one of the greatest manufacturers of capital
equipment in the world, and so is Switzerland for that matter,
and so this will strengthen that lead. We are talking about globalisation
and the fact that the specialisation in certain bits of Europe
is strengthened by a high emission trading price. People think
that a high emission price equals high costs: not so, a high emission
price may—and our modelling suggests it strongly does if
the policies are well-designed—yield great benefits and
leadership for the world economy, especially at a time of a global
depression when we desperately need more investment.
Q230 Lord Brooke of Alverthorpe:
Are not the Germans burning an awful lot of coal and have hardly
reduced it?
Dr Barker: I hesitate to say this but
maybe the German government has been partly influenced by certain
lobby groups, led by former Chancellor Kohl.
Q231 Lord Brooke of Alverthorpe:
It is not because it is cheap?
Dr Barker: It is only cheap because the
carbon price is too low. If the carbon price was much more reasonable,
$100 per tonne of CO2 perhaps, then it would not be cheap any
more. The price signals are wrong.
Q232 Viscount Brookeborough: I thought
you just said a minute ago that the carbon price was not reflected
in the end price.
Dr Barker: Yes, because the target is
too low. The overall targets should be much higher.
Q233 Viscount Brookeborough: Therefore
the carbon price, if it goes up, would be reflected.
Dr Barker: But then coal would not be
profitable any more. They would stop doing it and they would not
lobby for it.
Q234 Lord Brooke of Alverthorpe:
Could I jut follow up the question on pricing, My Lord Chairman,
on the depression that we face? Have you started doing modelling
work?
Dr Barker: We have.
Q235 Lord Brooke of Alverthorpe:
On the consequences, for example, of today's statement and how
it will work through.
Dr Barker: Not today's statement. I have
written a letter to the Financial Times; that is the extent
of my modelling, I am afraid, on today's statement—or what
is reported in the papers. I have not read all the papers, I have
read today's Financial Times.
Q236 Lord Brooke of Alverthorpe: I should
not have said today's statement but I mean the general change
in the outlook and forecasts.
Dr Barker: We have some idea but not
very much.
Q237 Viscount Brookeborough: I am
just wondering, My Lord Chairman, if we could perhaps follow up
afterwards when maybe you have done some further work on this.
Dr Barker: Certainly, we are very happy
to do that.
Q238 Viscount Brookeborough: And
what it will look like because it does have a major impact.
Dr Barker: But of course it is an ongoing
situation and the government decisions that were taken yesterday
affect the length of the ongoing depression.
Q239 Lord Palmer: Going back to my
earlier question, what about the volatility of fossil fuels?
Dr Barker: That is a very interesting
aspect to the question, I like that.
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