Examination of Witnesses (Question Numbers
240-259)
Dr Terry Barker and MS
ANNELA ANGER
8 OCTOBER 2008
Q240 Lord Palmer: I am so glad.
Dr Barker: When we are talking about
fuel prices it is very important to distinguish between the different
fuels because they have different carbon contents. If we talk
about fuel prices and say they go up, then it makes a huge difference
whether they go up in relation to the carbon content of the fuels,
in relation to the wholesale price of the fuels, in relation to
the retail price of the fuels; these will all give different answers,
that is the problem. Thinking about answering your question—because
I actually thought about all these questions on the train—if
the question had been phrased as oil or coal or oil and gas, in
order of their carbon content, then it would have been much clearer
because if the coal price goes up the system will shift towards
using less coal, if the oil price goes up—and of course
that has been the big headlines over the last few years—then
there will be a shift to more coal because coal will be cheaper.
The question therefore becomes extremely complicated. We have
been struggling with our modelling and trying to look at the whole
issue in terms of the uncertainty and the volatility of the prices
rather than the conventional way which is to assume away this
volatility and take averages and means. It becomes a little bit
more complicated but one can understand quite what is going on.
The basic issue with oil prices is that if oil prices go up, then
this will encourage countries like China to use much more coal
and indeed the UK to use much more coal because of the indirect
relationships. Unless there is a strong emissions trading scheme
in place, which will offset that tendency in the market—and
that is the great value of an emissions trading scheme, it protects
the carbon price in the face of such volatility and so does reach
the targets for carbon reduction.
Q241 Chairman: There is an OECD study
that basically comes to the conclusion that the only way in which
energy needs up to 2050 are going to be met is by a rapid increase
in coal. Does that chime with your thinking?
Dr Barker: That is under the assumption
of no policy changes, no global scheme.
Q242 Chairman: Bringing in more and more
coal.
Dr Barker: That is what the market will
deliver, but of course we have to add on to that energy security
because governments place energy security, as far as I can see,
in advance of efficiency and other issues and questions. Energy
security is very, very important to national governments, to make
sure that the lights do not go out, and a lot of our policies
are dictated by energy security considerations rather than economic
considerations or indeed fairness considerations. I think there
was another part to your question.
Q243 Lord Palmer: Yes, I am rather
hogging the thing. 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: Again, there is a lot of literature
on this issue and I will make my answer very brief. Because I
am coming from a position of looking to see what the carbon price
should be to achieve the stated government targets, the two degree
targets, I would think the range should be quite high, especially
given the potential benefits from having a high carbon price.
That is conditional, however, on what I would call well-designed
policies, and policies may not be well-designed but may be designed
for interest groups to capture the results and the profits, in
which case you would have a not well-designed policy and the high
carbon price would yield huge profits to particular segments of
the community. The answer is therefore extremely complicated but
if, in general, people were doing a good job and were following
good business principles and good ethical principles, then I would
expect that a carbon price in the range of €80 to €120
per tonne of CO2 in year 2000 prices would do the job—not
from the beginning and not globally, I am just talking about Europe.
It is good that we have a low price at the moment, but the expectations
in the market are that this price is not going to rise sufficiently,
that is the problem. The price therefore is not going to be large
enough even to support carbon capture and storage, according to
the studies as to what this is going to be. Governments can give
large amounts of money to carbon capture and storage, and indeed
the MEPs have added some amendment to the European law to do so,
but that will count for nothing unless the carbon price is high
enough, simply because carbon capture and storage—it is
quite obvious, it costs far more to take the carbon out of the
coal, burning the coal, than to leave the coal in the ground and
just burn it in the traditional ways. So you have to have a higher
carbon price to justify carbon capture and storage.
Chairman: If we can come to auction revenues,
Viscount Ullswater.
Q244 Viscount Ullswater: We have
touched on this already but I would like to tease out a little
bit more from you, Dr Barker, because you have talked about transparency
and perhaps in order to increase or perhaps even achieve transparency
in the ETS do you suggest that it is important to hypothecate
the revenues from this scheme to provide low cost loans for investment
in clean technologies, to improve the quality of housing which
I think you mentioned, and are there any downsides to this sort
of hypothecation? How likely is it that the Government will just
want the revenues?
Dr Barker: Again, this is a complicated
question and there are a lot of different aspects to it. If I
could just answer the hypothecation part of it, because that is
very important, treasuries are naturally very against hypothecation,
they do need to raise revenues according to the economic principles
appropriate to raising revenues and that is quite separate from
the economic principles appropriate to spending the revenues.
I am quite clear about that, it is an important rule and it is
a rule that treasuries fight to maintain and I think they are
very right to do so. When it comes to the emissions trading scheme
we have to start from the position that this is not a tax, this
is not legally a tax, it is not the same as a taxation, so we
can always start seeing ways of moving away—and of course
there are very important reasons why it is not a tax. I am now
getting to another part of your question—can you remind
me because I tend to lose track thinking of lots of different
things. Was there another aspect of the question?
Q245 Viscount Ullswater: Really what
you would see the revenues being spent on, whether it should be
low cost loans to improve technology, for improving the housing
stock, and are there any downsides on that sort of equation?
Dr Barker: Yes, there are downsides.
First of all there is a transparency issue and the reason it is
important and very valuable to auction all the revenues is that
then becomes transparent, as to what the value of these permits
is. Then they can be given back to the industry, not as free allowances
which look as if it is not a lot of money but as actual money.
That is important and that is essentially what I am suggesting
should happen. Then we could see the money going to the electricity
companies, for example, in Phase Two as however many billions
it is that they are getting and then they can say how they have
spent that money, if they have spent it on giving it to their
shareholders or to the directors in bonuses or whether they have
invested it in low carbon technologies or, worse, invested it
in coal stations, which some of them are wanting to do and so
worsening the problem. That is the issue of transparency, but
then there was another aspect to your question which followed
on from that which was the downside of allocating the revenues
to low carbon technologies, processes and products. That is something
which the Americans are very keen on and certainly Obama's scheme
has a lot of that. I am extremely supportive of that because the
modelling suggests that this will be very beneficial because it
will accelerate—we call it accelerated technological change
as opposed to induced technological chance from the carbon price.
It will accelerate technological change by supporting innovation
and correcting a market failure in that the innovators cannot
capture all the rents from their innovation because other innovators
take it from them. So that particular subsidy is correcting a
market failure; this is well-known in the literature, there is
a lot of literature about this. This is standard stuff, I am not
giving you anything unorthodox here.
Q246 Viscount Ullswater: Do you think
this will happen or do you think the Government will pocket the
revenue and let the industry find its own way through this?
Dr Barker: The legislation can require
it to do so. It can be monitored and audited, I would not see
that as a problem but you may be more expert than I am on that
actually.
Chairman: We will have a look at the allocation methodology,
Viscount Brookeborough, and then come back.
Q247 Viscount Brookeborough: This
really continues on and goes into it in a bit more detail, perhaps.
You argue that all emissions permits, including those for sectors
deemed susceptible to carbon leakage, should be auctioned, and
a minute ago you said they should be auctioned initially.
Dr Barker: Yes, entirely, for transparency
and to get the market working.
Q248 Viscount Brookeborough: There
would be no free distribution whatsoever.
Dr Barker: No.
Q249 Viscount Brookeborough: Let
us say there was a new industry producing power or energy or whatever,
it would have to factor into its economy the buying.
Dr Barker: Indeed, it would have to.
Q250 Viscount Brookeborough: Do you
think the Government should hold the bank balance?
Dr Barker: There clearly needs to be
a proper mechanism for distributing those revenues with which
the Government has decided to support new industries and alternative
ways of doing things. I do not think the Government is in a good
position to do that, it is more the job of organisations like
the Carbon Trust, working at a national level, who have got good
knowledge of what the appropriate innovations in that particular
economy involve. That is what the Carbon Trust does and I think
it does a good job.
Q251 Viscount Brookeborough: Would
any of this be traded internationally therefore or would this
just be in national envelopes?
Dr Barker: The reason why I would argue
that having national schemes is important, like the Carbon Trust—or
in the United States even state schemes would be important—is
because of information and local knowledge and what is appropriate
in the circumstances of the UK. The UK has got all these tidal
streams, Austria does not, so the UK should be developing tidal
power if that is economic, or certainly investigating it. For
that reason they should be national and of course that also fits
in with other national institutions, national laws and all the
rest. I am therefore very much in favour of subsidiarity which
is actually what this question is about.
Q252 Viscount Brookeborough: How
significant is carbon leakage?
Dr Barker: Very, for certain industries.
I mentioned before that a company could go bankrupt and therefore
all the emissions could go to China or to Russia or something,
so it is a very important issue for small sectors. It is not an
important issue for the electricity sector, for example, because
electricity is not traded, so we are talking about carbon leakage
in the sense of trading and international competitiveness. It
is very important, it has to be taken account of, industries are
right to be worried about it, but it is also used rhetorically
as is international competitiveness, by lobby groups basically,
just arguing that they are going to go down the tubes, if I can
use that expression, because they have to face a carbon price.
My answer to that is let us be transparent, let us have full trading
and then they have 100% subsidy, but that subsidy phases out and
we can all see what they are going to do with that money and whether
they need it, and whether indeed that is going to stop carbon
leakage. The thing is that that carbon leakage may be due to other
reasons; it may be due to the fact that energy prices are higher
in Europe than they are in China or Russia and therefore the industry
is on the point of going elsewhere irrespective of whether there
is an emissions trading scheme or not, or labour costs.
Q253 Viscount Brookeborough: Can
I just go back to one other thing you said earlier when you were
talking about the different types of energy and gas? You seem
to be absolutely happy with the security of gas supplies from
the Far East and from Russia but recent events as far as Russia
are concerned and as far as east of Eastern Europe are concerned
surely show that these are not very secure necessarily.
Dr Barker: I must say that the last time
I was speaking about it I was speaking from a UK perspective.
Q254 Viscount Brookeborough: You
think our gas is totally secure.
Dr Barker: No, I do not, no, I do not.
I think our gas supplies from abroad are secure in the sense that
they are not dependent on one particular supplier, Russia; the
amount of gas we get from Russia is very small and of course the
security situation changes over the years as different supply
routes open up. We are seeing large construction of liquid natural
gas plant in Wales and in southern England and that will secure
supplies, and I am sure the industry will develop further from
there.
Q255 Lord Wallace of Tankerness:
Dr Barker, you said that you take the threat of carbon leakage
very seriously; how do you believe that the Commission's proposals
measure up in addressing that problem and are there specific proposals
that could be recommended to tighten it, to address it better?
Dr Barker: I have not done enough work
on the recent proposals to be able to give a proper answer on
that. I have the impression that the Commission has devised rather
neat schemes, but I may be wrong, that will in fact cope, but
of course they could be subverted by the MEPs for all I know.
This is a complex area because of the lobbying going on so I have
not seen sufficient detail of the Commission's proposals to be
able to answer that.
Chairman: Let us go to access credits. Lady Sharp.
Q256 Baroness Sharp of Guildford:
In the short paper you provided us you argued that the external
credits through the clean development mechanism and the joint
implementation mechanisms were being given too freely in Phase
Two of the emissions trading system such that they can be used
to avoid the domestic abatement measures.
Dr Barker:Yes.
Q257 Baroness Sharp of Guildford:
Could you tell us a little bit more about that and the linkage
between this and the certified emission reduction certificates
that are part of the domestic scheme.
Dr Barker: To achieve the two degree
target, the scientific evidence on the IPCC work suggests that
the whole of the global economy has to be decarbonised, that all
of us have to stop emitting CO2 via our use of carbon, our burning
of carbon. That means that every country—China, India, Russia—if
we are actually going to achieve that target must reduce its emissions
to zero and then we must go beyond that to actually start pulling
CO2 out of the atmosphere and burying it, or growing plants or
allowing forests to grow naturally and not burning them down et
cetera. Starting from that position you can see that the issue
becomes, for an economist, how to achieve decarbonisation effectively,
efficiently, equitably and flexibly, and it is a question of timing,
who does what when. Then you would want to look to see, if you
were taking the world economy and the system as a whole to try
and answer that question, and say maybe it looks very likely that
certain sectors like the car industry, because of other factors—the
fact that the oil price has gone up so much and you cannot use
coal to run cars—it might be good to decarbonise the car
industry first of all. This might be of really great benefit to
the car industry, and so you say how quickly could that be done,
it is an engineering problem. Of course, this is setting aside
all these credits and all the rest, and I will answer the credit
bits in a minute. It is a question of which sectors when, what
economic benefits there are and what would decide benefits. If
the car industry decarbonised its product so that cars are all
electric then we can see many side benefits—our cities are
much cleaner and less dirty, less noisy—of course we need
to know about the noise so that we do not get run over, but that
is the case, an electric car city would be more like Disneyland
than like what we have got, which is a nightmare.
Q258 Chairman: I do not think that
Disneyland is a great improvement on life.
Dr Barker: It is quiet, and clean, and
good for the children. To return to the issue of the credits and
how important they are, the credits are very important because
that is really the only means by which in the present regime large
amounts of money can go from the old emitters to the new emitters,
from the UK to China or to Pakistan or whatever. That is because
they are extremely important and I would support having quite
large amounts of money transferred there, but then you would get
large amounts of money if the price was right. It is the price
being too low that is the problem.
Q259 Chairman: Can I just repeat
what you said, and correct me if I am wrong: to reach the 2% target
the whole of the global economy has to be decarbonised.
Dr Barker: Yes. That is clear, unambiguous,
nobody quarrels with me in the IPCC; if Bob Watson came to give
you evidence, he would confirm that; I give a presentation showing
that to international conferences all over the world and nobody
contradicts me, no one says you are wrong.
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