Sunday, March 30, 2008


John Rhys
May 2007

The following notes were prepared as a basis for written evidence to be submitted to the Joint Committee on the Draft Climate Change Bill in May 2007. The comments are addressed to the themes of the Committee’s inquiry.

1. The main aims and purposes of the Bill and why it is needed.

A recent BIEE Climate Change Policy Group paper[2] summarized the case for urgency of action on climate change. The following extract provides a neat summary of at least part of the case for action in relation to the institutional framework.

Policy has over the last two decades been set in a “liberalised market framework”, with a mixture of competitive markets and regulation, and many economists and politicians continue to rely exclusively on market driven solutions. While recognising the fundamental importance and powerful advantages of markets, we believe the current framework, unamended, is unlikely to be capable of promoting large scale investments in new low carbon technologies or fundamental long-term change in complex UK (or for that matter international) energy systems, since:

· “Climate change represents the greatest market failure the world has seen” (Stern).

· “Carbon valuation”, to internalise the costs of CO2, is not embedded in the economic system, and it has so far proved very difficult to implement in a manner that will give confidence to investors in long term assets, eg in power generation, by ensuring that the reward for carbon reduction will remain over the life of the asset.

· R&D investment may be particularly susceptible to market failure problems in industries where it is difficult for individual firms to capture the benefits. The energy sector has been notable for low and declining R&D in recent years, and the potential for market failure is enhanced by the absence of a clear and stable framework to put a value on the benefit of “low carbon”.

· Solutions based on the creation of market structures, such as for the trading of carbon, must play a hugely important role; but, to be effective, they will require not only Government endorsed targets for emission reduction, but also carefully designed policy interventions and regulatory supervision.

· In a number of cases decisions on infrastructure may have a profound effect on the economic and commercial choices of preferred technology, eg on the form of the electricity grid or on a pipe network for CO2 capture and disposal, requiring some degree of centralised decision making.

All these factors suggest the need for some amendment to existing regulatory and competitive market structures. Indeed small-scale incremental adjustments to existing market and institutional frameworks are unlikely to suffice and additional policy instruments are likely to be required.”

Club of Rome. Lord Lawson, in his recent evidence to the Committee, drew parallels with the “alarmist” projections of the Club of Rome. The failure to materialise of these early prophecies of doom led, unsurprisingly, to their characterisation as neo-Malthusian fallacies. However global warming in relation to man-made climate change has one economic characteristic which destroys any possible analogy. In the main the Club of Rome addressed the subject of natural resources, such as oil and minerals, for which actual or potential shortages are translated rapidly into price movements. Higher prices can and do induce substitution and both supply and demand responses. However when the scarce resource is a common good, like many aspects of what we choose to call “environment”, it does not, absent intervention, have a market price and users do not have to bear or respond to the external costs of their own consumption. The normal checks and balances of prices related to costs, and of supply and demand response, simply do not operate. In the absence of mechanisms to internalise the externalities of excess usage of an environmental resource, in essence what CO2 emissions are, there is nothing to curb demand or increase supply.

2. Appropriate to legislate? Balance between compulsory and voluntary action.

We should recall that “voluntary” action on energy conservation has been a feature of the energy policy landscape since the mid-1970s’ and that its achievements have been at best limited and partly undermined, perhaps, by falling real energy prices. Given the urgency that now attaches to real action to reduce emissions, it is clear that a new framework is required, and that legislation is likely to be necessary for many of the market based or regulatory initiatives that will be required. Climate change legislation also provides an opportunity to inject momentum into CO2 policy.

The balances that will need to be found in the future are between “compulsory” and “voluntary” measures, when so described in relation to individual choices by consumers or other economic actors. The most important distinction that can be drawn is between “voluntary” action in response to market pressures and new market signals, admittedly helped and reinforced by public education, and “compulsory” measures based on regulation, relevant examples of which might be building standards, planning requirements or motorway speed limits.
While there may be a general preference for “market” solutions, and the scope for new markets is covered in the Bill, it is likely that there will be a significant dimension of “regulation” required in future policy. One question to address therefore is whether possible future measures in respect of regulation are adequately covered by the Bill.

3. Inclusion of GHG; and the adequacy of the proposed 60% reduction.

In principle, and in the longer term, it will be important to move to a broader and more comprehensive system of greenhouse gas control. This should therefore be kept under review. The practical case for maintaining the immediate focus on CO2 is that it allows earlier progress to be made on the largest single element of the problem. To wait on resolution of the scientific, technical and political questions associated with a full GHG system might result in unnecessary delay to essential action that can be taken now.

The position on the adequacy of a 60% target is analogous, in that

- the most recent scientific consensus[3] indicates the need to aim for atmospheric concentrations of CO2 of less than 550 ppm
- with the lack of progress in reducing emissions over the last decade there are real doubts[4] as to whether a 60% target would deliver cumulative emission reductions adequate to achieve even the less demanding target of 550 ppm in 2050.

- the BIEE Climate Change Policy Group has expressed the view that “we should at least consider the implications of a more challenging 80% target, as well as the more conservative 60% UK reduction considered hitherto”.

The essential issue is that a limit based on an 80% reduction would be a further major reduction in carbon emissions, implying only half the allowable emissions of CO2 in 2050 compared with a 60 % reduction. As such it almost certainly implies significantly higher adjustment costs, and is also likely to imply measures which would impinge on the nearer term targets. It would therefore be harder to justify an 80 % reduction as a UK unilateral measure at this juncture.
Thus, if risks of delay to the passage of the Bill are to be avoided, the most appropriate compromise or practical approach is to proceed for the time being with limits based on the 60% target as outlined in the Bill, but to recognise the probability that the UK will wish or indeed need to move to a tighter limit in the future, most probably as part of a coordinated international response. This does not appear to call for any obvious major adjustments to the Bill, other than to ensure that both Government departments, in their monitoring and policy development, and the Committee on Climate Change, in its advisory role, do take into account the implications of tighter international objectives as exemplified by an 80% path.

Finally it is important that CO2 targets align with the true underlying objective. This is to minimise cumulative emissions, not to achieve a particular level by a given date. A target such as 60% reduction in annual emissions by 2050 may be a useful indicator of what is required, but it should not obscure the primary objective, reinforced by Stern, of keeping cumulative emissions within “safe” limits. Exclusive preoccupation with ultimate 2050 targets ignores the importance of the path of emissions reduction both in determining ultimate emissions and the “exemplary value” of UK action. There is therefore a case for expressing targets in terms of cumulative emissions.

4. What difficulties face the Government in controlling UK carbon?

The carbon budgeting system, and its associated accountability and monitoring arrangements, should facilitate public scrutiny of the whole corpus of policies and measures concerned with the low carbon issue. Effective accountability will need to consider not only recent emissions against budget but also those steps being taken to create the conditions for necessary long term technological and system changes.

The carbon budgeting system should therefore have space for detailed descriptions, endorsed by Government, on how the emission targets (both short and long term) are to be achieved, subject to necessary flexibility and with due regard to “urgency”. The concern here is not only with direct action by Government but also with action by other agents for change operating within policy frameworks set or influenced by Government

In this context the ideas set out by the BIEE Climate Change Policy Group[5] on time critical pathways, essentially documents that set out expectations on how sectoral targets are to be achieved, could play an important role in making the proposed carbon budgeting system fully effective. There are two specific points of entry.

(i) Section 6 requires the Government, whenever a carbon budget is set, to produce a report setting out its proposals and policies for meeting the carbon budgets for current and future budgetary periods. Note 34 to the Bill states that “this clause aims to enshrine transparency in the system so that Parliament is clear about how the Government intends to achieve its new obligations”.

(ii) Section 21 requires that the Committee on Climate Change report annually to Parliament its views on progress being made towards meeting not only the carbon budgets already set, but also the long term target for 2050.

It is difficult to see how these duties could be discharged satisfactorily without reference to something like Government-endorsed “time critical pathways” for the main sectors of electricity, transport and buildings.

Economic Costs of Adjustment. While one should not underestimate the scale of the task, I believe that the purely economic costs of adjustment, either to GDP or to consumers, are frequently overstated. As an example, the electricity sector accounts for some 35% of UK CO2 emissions and clearly has to become virtually carbon-free by 2050 if even a 60% target is to be achieved. However this is a sector in which a very large replacement programme would in any case be required over the next 20/30 years just to replace aging nuclear and coal stations.

Just to get a feel for the magnitude of the economic impacts for this sector, it is instructive to look at the French economy, which effectively converted electricity to carbon neutrality in two decades, from c 1980 on, while at the same time maintaining some of the most competitive power prices in Europe. France, apparently, made at least half the progress associated with a 60% target, within two decades, without any obvious excessive cost burden or adverse economic consequences.

5. Use of credits from overseas investment projects should be permitted ?

The BIEE Climate Change Policy Group has addressed this question directly in its submission to Government.

“We recognise that emissions reduction is properly regarded as a global issue, and this requires in principle that there should be no restriction or disincentive to UK agents making genuine cost effective investments to reduce CO2 or GHG emissions in other countries, especially where these may be more cost effective than UK investments. However the use of overseas credits does raise a number of serious practical questions that need to be resolved.

First, the integrity, credibility and additionality of such schemes needs to be assured, as any revelations of schemes of dubious validity will serve to undermine both the domestic political consensus for action on CO2, and any exemplary value of UK action internationally.

Second, if the purchase of even soundly based international credits was on a scale that left only minimal “domestic” reductions, then the exemplary value of UK action would be severely damaged.

Third, analysis suggests that the availability of international credits will be very difficult to predict, as it will depend both on the implementation of projects in countries with sometimes difficult regulatory regimes, and also on the demand from other developed countries whose policies are still evolving. Unconstrained use of such credits could create significant uncertainty about the level of domestic emission reduction that is required, and undermine the stability of the CO2 price, with a damaging impact on investment.”

6. Constitution, remit, powers, and resources of the Committee on Climate Change.

Remit. There is a good case for separating the design and implementation of climate change policy, on the one hand, from monitoring and accountability on the other; this would increase the credibility of the monitoring agency and thus improve the enforcement of emission targets. However the Committee is likely to develop considerable expertise and may be drawn into an advisory role on policy. This may create tensions for its main role.

Factors to consider (section 5.55). While all these factors are relevant, they are rather all-encompassing and should not all have equal weight in the Committee's deliberations. The Committee needs primary objectives more narrowly defined in terms of climate, technological, and energy policy issues within a sound framework of economic analysis.

Composition. The focus should be primarily on expertise. Stakeholders would not carry credibility and would inevitably be drawn into protection of special interest positions.

Resources and expertise. In 5.57 of the consultation document, part (e) should be redefined as energy production, supply and utilisation. Energy policy should also be included explicitly as an area of expertise. Most importantly, the list should include expertise in regulatory or regulatory economics issues. The Committee itself needs considerable strength on these issues as well as some sound grounding in climate science and technology. Some areas will inevitably need to be supplemented in the supporting staff and perhaps in commissioning additional research.

[1] The group consists of a number of energy experts, but does not claim to represent the views of the BIEE membership as a whole.
[2] Bringing Urgency Into UK Climate Change Policy. BIEE Climate Change Policy Group, December 2006
[3] The recent IPCC report for example suggests that lower concentrations, of between 445ppm and 490ppm, would keep the temperature rise in a range of 2.0-2.4C. This compares with EU policy of seeking to avoid rises of more than 2C.
[4] Tyndall Briefing Note 17, March 2007

[5] Bringing Urgency Into UK Climate Change Policy. Paper by the BIEE Climate Change Policy Group, December 2006, and also Time Critical Pathways For UK CO2 Reduction, Supplementary Note, February 2007

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