House of COMMONS
MINUTES OF EVIDENCE
ENVIRONMENTAL AUDIT COMMITTEE
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Taken before the Environmental Audit Committee
Mr Tim Yeo, in the Chair
Mr Martin Caton
Mr David Chaytor
Dr Desmond Turner
Memorandum submitted by the Committee on Climate Change
Witnesses: Lord Turner of Ecchinswell, a Member of the House of Lords, Chairman, and Mr David Kennedy, Chief Executive, Committee on Climate Change, gave evidence.
Q223 Chairman: Good morning and welcome to the Committee. Can I begin by thanking you for changing your plans to fit in with this date; we were having some difficulty, I know, and we much appreciate the fact that you put yourselves out in order to talk to us today. Can I start by saying how much I welcome the work your Committee has done since it was established. I think it has made a tremendously valuable contribution to the debate; and, in particular, I warmly welcome the report that was published two weeks ago as a very important report in its own right and also, I hope, an indicator of the future series that is coming. Could I start by asking what you think the Government will do in response to this report?
Lord Turner of Ecchinswell: We hope that the Government will reinforce its determination to do some of the things that it was doing in any case. We talked in this latest report, the first progress report to Parliament, about the need for a step change in the pace of reduction; that we had entered the first budget period running at about reductions of 0.5% per annum and we now need to go at about 2-3% per annum. We identified some of the aspects of policy which we think need to be reinforced or changed to be on that more aggressive path. It is true, several of those are in the Government's Low Carbon Transition Plan, so they were not things we had completely independently thought out. We had been continually interfacing with the Department and understanding the plans that they had in any case. There are some aspects of what needs to change which I think are underway already: for instance, a significant intensification of the approach in energy efficiency in the home; the need to move beyond the existing supplier obligation area. There are others where we believe there is a need for action, and I think it is now for the Government to respond and say what it plans to do there. For instance, we talked about looking at some stage - once we are beyond Copenhagen - at the whole operation of the electricity market, and whether that operates in a way which is conducive to the investment that we need in a decarbonised electricity system. Finally, if I could flag one thing in the area of transport, we flag the need for some pump-priming support to electric cars now. There is already money in budgets as that relates to that; I think it was £250 million committed; we flagged that there may need to be more than that to get us beyond this chicken and egg problem in electric cars. I think across the range of policies the key thing we have been saying is the need for a step change. Several of the aspects of that step change are already there and planned in the Low Carbon Transition Plan; and the key thing we would like to see in a response is working through the different areas where we have identified that need for a step change, and making sure that the policies are in place to deliver that.
Mr Kennedy: There are four specific things we will look at, and so over the next months we will be very focussed on the heat and energy saving strategy, so we have got a draft strategy that will come out in final form. We have set out our position on clean coal; and the Government will announce its framework for clean coal I think in December; so again we will be looking at what they say there. Another key area is renewable heat; and there is a proposal for a renewable heat incentive that is due over the next months; that will be key. Then there is a formal response required under the Climate Change Act by the Government to our report I think in January next year.
Q224 Chairman: We will return to some of those points in a
moment. One of the things you said was
Lord Turner of Ecchinswell: I do not know, but I think it is something for Government to debate and also for Opposition parties in Parliament to debate whether they are happy to accept that commitment. The background, of course, is the impact of the recession on emissions. Now it is not absolutely clear how big that will be. We have obviously focussed a lot of attention on it; we have used various different models to try and get a grip on it; but we think the recession in itself may take out somewhere between 40 and 70 million tonnes out of the first budget period which is, as it were, a reduction in our carbon emissions because factories are running less than they were before et cetera. It is very important that we do not allow that reduction - for reasons of economic recession - to fool ourselves that we are on an underlying path; and that is why we have not argued that Parliament should, as it were, go through the formal process of changing the first budget - we do not think that is required - but we do think there should be an objective aiming to outperform the first budget. We have also said that if we manage to outperform the first budget we should not bank that saving to allow us to under-perform the second budget. That is the logic. I do not know what the Government are going to say on that, but I think it is an important issue for the Government and the Opposition (since we are in a pre-election period and therefore do not know what the Government will next be) all to decide what their attitude to that is.
Mr Kennedy: I think it will be hard for them to credibly not agree to out-perform. There are things we have to do in the first budget period to be on-track to meeting the second and third budgets. The Government is committed to doing those things, and if they achieve what they are committed to then they will out-perform.
Q225 Chairman: You have mentioned some of the aspects of the Low Carbon Transition Plan: do you think, taken as a whole, that Plan will ensure that we actually deliver the sort of step change that your progress report believes is necessary?
Mr Kennedy: The Plan is certainly a move forward, in the sense that it is a set of commitments from the different areas of Government that - if they could be delivered - will meet the carbon budgets. There is a question: can they be delivered? What we have said in our report is, we have good foundations in terms of the existing policy framework but it needs tightening in the various areas. If you think about houses: are we going to achieve carbon budgets with the step change we need under the current framework? We have said: no, we do not think the energy supply-led approach will deliver. We need a different approach around a national programme. Are we going to achieve the transport emissions reductions we need under the current framework? Again, we need some policy strengthening. The same applies for renewable electricity and renewable heat.
Q226 Chairman: Some of the observers still think there is a bit of a gap between the vision and the delivery at the moment. We hear evidence from a variety of people - academics, NGOs and so on - who would say that. The figures that you have published in the report show very vividly that extrapolating what has been achieved in the past leaves us a long way short of a big and growing gap. Is it not clear that, if we allow that gap to open up at all, the task for the back end of the period to 2022 becomes even more challenging and difficult?
Lord Turner of Ecchinswell: Yes, that would obviously be the case. If we continue to run for several more years at the 0.5% reduction we would have a problem. We are unlikely to do that in 2008 and 2009 simply because the very preliminary figures - we do not even have the full figures for 2008 yet - clearly do show some significant reductions, but we think that has got a lot to do with the onset of recession. If we are not making underlying progress over the next five years we will then be piling up a need for catch-up subsequently. I think our overall attitude to the Low Carbon Transition Plan is that it is recognition by Government of what we have flagged; that the pace at which we have been making progress is not adequate and that we do need this step change. As David has said, it has identified a set of policies which, if they are delivered, are capable of getting us on the path that is required; but there is still some more flesh on the bones required to actually deliver that. For instance, in the whole area of home energy efficiency, I think there is already an emerging consensus that we need to move beyond the existing energy supply company-led supplier obligation approach - of a set of specific initiatives where they earn points for specific measures that they have taken - to a much more Government-led and required whole house approach; but there is still a lot of work to be done to put the flesh on the bones of what that is actually going to mean and how it is actually going to be delivered.
Q227 Chairman: Would it be fair to say that because the figures are a bit massaged by the recession at the moment nevertheless the actions that are taken in the next couple of years are absolutely crucial to the achievement of the 2022 target; because if we do not take the right actions (notwithstanding the flattering effect of the recession on the figures) there is going to be a real difficulty in the backend of the period?
Lord Turner of
Ecchinswell: That is right - across all
the different areas. For instance, if we
look at the electricity decarbonisation process - which we believe is
fundamental not only to take carbon out of electricity production but to
prepare us for what we need to achieve in the 2020s, where we probably will
apply electricity to a wider set of areas - if we are to hit the targets in
2020, for instance on wind generation, there have to be a number of projects
going into planning in
Mr Kennedy: Just to drive all those things as well - the
policies we have talked about, whether it is the power market, the clean coal
or the approach to houses - our indicator framework does include timelines for
when the policy decisions need to be made in order that these things can happen
over time. Those things have to happen
this year and next year; so it is not the case that we can wait five years, for
example, for the electricity market review; we have said that should be after
Q228 Dr Turner: You have made it very clear that the Committee's target of a 2o rise in temperature is something of a matter of judgment in terms of practicality and a whole range of issues. Do you think you could tell us something about the issues that have led you to the recommendations that are made?
Lord Turner of Ecchinswell: This was of course something which we did not cover in the latest progress report; we covered this in the December report last year where we were asked then to recommend on the target for 2050 and what that implied for the budgets to 2020. As you know, we ended up suggesting a global path which would take the whole world to a level of something like 20-24Gt of C02 equivalent emissions in 2050. Our reasonable share of that would imply something like an 80% cut below our 1990 level, and therefore we recommended 80% rather than the 60%, which was initially in the legislation; and then we set out the intermediate path for 2020 consistent with getting there. The key question therefore is: where did 20-24Gt come from? That is where one goes back to the science. We are not a scientific commission; we have a small scientific resource to help us and we have a number of a very good scientists on the Commission, but we do not do independent science research ourselves; that is not something we are geared up to do. We rely on understanding the consensus of the international scientific community, as expressed by the IPCC reports, and using the Hadley Centre in particular as a resource to run scenarios for us. We were trying to understand some of the uncertainties of the science; and the uncertainties in the science are considerable; and all that the science can give us is probability distributions of future results - not definitive results. In terms of what path of emissions leads to what temperature increase, we described it at considerable length and we went through it and challenged the scientists et cetera but ultimately it comes off things like the Hadley model and the IPCC. The question then is: how did we decide what the objective is? We looked at the work of the IPCC Working Group III on the impact of adverse climate change and came to the conclusion that what that suggests is, firstly, that an element of climate change is unstoppable: even if we literally cut all emissions to almost zero today given what has occurred over the last 200 years we are probably on par for something like 3/4o or even a degree above pre-industrial levels; that is cooked into the system already; so that is point one. Secondly, the impact analysis does not show any magic point where you say, "Up to 11/2o or up to 2o is absolutely fine; beyond that its disaster". What it shows is an accelerating and increasing set of harms, and it in particular shows that that harm tends to increase very significantly as you go from 2o to 3o to 4o. Thirdly, there is some evidence in the science that at some level these effects become really catastrophic and you get self-reinforcing cycles. There is some level at which the world really has to make sure that it definitely does not go ahead - above - under any circumstances; because then we really are into completely uncharted territory, first of all, in terms of the feedback loops within the science; and, secondly, in terms of the increased impact on human welfare. It is a judgmental process but looking at that - and also looking at what is doable starting from where we are - we ended up believing that a reasonable way forward was to say: firstly, in an ideal world the world would not go above 2oC above pre-industrial levels, point one. Secondly, it is actually very difficult to do that with a high certainty. If you were to set the target as being you want a 99% certainty of not going above 2oC we would have to start dramatically de-industrialising today. To get that probability down to the 1% or 2% level is a huge challenge which we might not meet. Thirdly, we therefore said: the challenge is to make sure that any overshoot above 2o is as small as possible. Fourthly, we said: we have to have some sort of rule out there that says we are keeping to very, very low levels the danger of catastrophic change; and we defined that as, we want to be on a path where the best scientific analysis would now tell us that the chance of going above 4oC is below 1%. You would have that as a decision rule which you are continually refreshing. If in ten years' time they said, "The scientific understanding has changed; we used to think that this path got us to a chance of less than 1% of going above 4o, we now think that has gone up to 2%", then you have to reinforce your policy and accelerate at that stage. We ended up with a decision rule which says, "We want a path where we are trying to limit to as small as possible the overshoot above 2o, indeed we are trying to have a 50:50 chance of not going above 2o at all". There is no particular science. Why would one care whether that chance is 52 or 48; but it gives one some sort of anchor. The crucial thing is limiting the extent to which we go above 2o and keeping very small the amount to which we go above 4o. That was the decision rule we set ourselves, and that decision rule sort of ends up with an 80% cut. It, first of all, ends up with a global target of getting down to something like 20-24Gt by 2050 and, by the way, going on down to 8-10Gt by the end of the century, so that is not the end of it. That is the process that we used. It is an inherently judgmental process given, first of all, the uncertainties of the scientific understanding of the relationship between emissions and temperature; and, secondly, the uncertainties of the scientific and economic understanding of the relationship between temperature increase and impact on human welfare.
Q229 Dr Turner: Of course, the relationship between CO2 equivalents and temperature is a very broad one and a most uncertain one. I entirely sympathise with your difficulties - we all share them - but a 50:50 probability is a very high probability. Certainly if the world's luck is anything like my own personal luck then it is absolutely certain that the world temperature rise would exceed 2o. First of all, would you wish to set lower targets in order to try and minimise that possibility; and if not why not; and, secondly, are you happy that the public and governments appreciate that the 2o that is generally talked about is not something you can rely on with any confidence, that it is just a probability and there is at least a 50:50 chance of it being exceeded and things being much worse than even is predicted?
Lord Turner of Ecchinswell: I think you are rightly illustrating that there has been a bit of a disconnect between true scientific understanding which has to be based on probability distributions of the results and the way that this phrase "2o" has entered the media and public imagination as if it could be an absolute figure. We do not think there is any particular magic about a 50:50 chance as against a 55:45 chance of going above 2o; i.e. if you said, "At the moment I think the chances of going above 2o is 45%", and then two years later, "The scientists now tell me that it is 55%"; there is nothing which would suddenly say, "Oh, that's a disaster for the world". What I think would be a much more worrying feature is if the science began to tell us, "Ah, we were previously telling you that there was a 15% chance of going above 3o and that's now become a 35% chance of going above 3o"; that is I think where you want to concentrate. You want to concentrate on how the probability assessments of going above 21/2, 3, 31/2 and 4 are increasing. Are those going up from very low levels, particularly at 4o, to higher levels? That would be the red flag where we have really got to start doing something; because, as I say, we feel that the analysis suggests that it is between 2o and 4o that the world goes from a challenge which, although it will produce some detriment to human welfare at 2o, the world is probably capable of adapting to, and with some positives as well as negatives; so by the time you get to 3o and 4o very, very significant negatives and potentially irreversible effects; so that is the way we think about it. Should we worry that that is not well understood externally? I do not know. We have got our own way of thinking about this. We think it gives a fairly coherent basis for public policy. It does create a somewhat confused debate externally, because people do occasionally say, "Well, you're giving me a 50:50 chance of going above 2o. Have things slipped?" but that was always there. I do think people need to understand that if they wanted to get the chance of going above 2o down to, say, 20% or 10%, we have not run the figures but I think you would be on a dramatically faster path of reduction than anybody is talking at Copenhagen negotiation levels at the moment; that would be an enormous chance. What all this illustrates is, that alongside the mitigation plan that gets us down to approaching 20Gt by 2050, below 10Gt by 2100, if that is our path we have to accept that that is a path which will still, in all likelihood, have significant global warming effects; and therefore there is a very important adaptation agenda, particularly in the areas of the world most affected by climate change and most vulnerable to climate change; that is why there needs to be an adaptation agenda as well as a mitigation agenda.
Q230 Mark Lazarowicz: One of the issues which you have raised in the report is the issue of the carbon price and how this drives investment in low carbon and renewable power generation. You identify a number of actions the Government needs to take to address these but what is your view as to how the Government should prioritise these objectives?
Lord Turner of Ecchinswell: We set out a menu of things that need to be considered. I do not think we are wedded particularly to one or the other because there are different ways of approaching it; and some of them depend on what might be feasible in European negotiations and things like that. Just to describe: in the electricity market in the past at the UK and European level we have placed a very strong reliance on the European Emissions Trading Scheme and the carbon price to pull through the investment in low carbon which is required; and that has reflected an economic theory that says if you combine that price instrument with our liberalised electricity market people will make the logical decisions to respond to that carbon price. What we have increasingly realised and what we flag in the report is that there is a problem here of cumulative uncertainty in investment decisions; and that cumulative uncertainty derives from an oscillating fossil fuel price, an oscillating carbon price and an oscillating electricity price, which depends on all the decisions that everybody else makes on the investments that they are going to make. When you realise that, you increasingly realise that the existing structure of policies is not fit for purpose for the world into which we are heading. For instance, in the electricity market domain we have a system of incentivising electricity investments where people make investments and they are compensated by the electricity that they will sell at some future period where their electricity price in the wholesale market is highly variable and is very high at some times of the day and year and zero indeed for most of the rest of the time, overnight, and on sunny days, and windy days in summer. When you step back and think about it, you realise that this is a system which is increasingly untenable as more and more of your capacity takes the form of things where you invest and then thereafter you have a zero or very low marginal cost; and that is the characteristics of both wind power and, indeed, of nuclear power. Indeed, it is very obvious when you think about it that if you had an electricity generating system which was entirely made up of things which had no marginal cost of production, i.e. it was all nuclear and wind, you could not possibly incentivise investment with the current electricity market system. We devised the electricity market system to achieve specific objectives back in the 1990s, and it made sense for a market where you could assume that the vast majority of generation had a marginal cost of production because it was using gas or coal; and it will not make sense so much in future. We are worried that the combination of facing an oscillating fossil fuel price, facing an oscillating carbon price, and with the current electricity arrangements, we will not pull through the low carbon investment that we need; or, if we do, we will pull it through at a higher cost to society than is otherwise required through, for instance, a higher level of rock multiples than would otherwise be required. We are flagging that we now need to take a step back and think about a set of other policies that might be required. One of those which we undoubtedly think would be attractive not just in the electricity sector but across the economy is an underpin for the carbon price. What has happened particularly with the recession is a very significant fall in the carbon price below what we had anticipated; and our latest forecast suggests that the carbon price will stay below what we had previously anticipated out to 2020. We had previously thought the carbon price might go to, what, €50 by 2020 -----
Mr Kennedy: ----- and now we think €20-€30 is probably the range, which is too low to support the investments we need in the power sector.
Lord Turner of Ecchinswell: Therefore we are flagging the issue and we see very considerable merit not just in the power sector but in other sectors of having an underpin to the carbon price within EU ETS which would basically make the EU ETS a hybrid of a carbon trading system and a tax system. Indeed, it is quite interesting, if you go back to the basic theory, for instance, which is discussed in the Stern Review of whether it is best to proceed when you use price instruments with a carbon trading system, where you set the quantity but the price is a variable, or a tax system where you set the price but the quantity is a variable, a lot of economists would always have said that the best combination is a hybrid which has a quantitative cap and a fluctuating price but an underpin within that. There are then some issues as to whether we could or should go that alone, but certainly it is the case that if we could get European agreement to a carbon price underpin, so that it could not fall below a certain level within the EU ETS, that is something which we think has a lot of attraction. We also think that the time has come to take a complete look at the structure of the UK, the way that the UK electricity market works, and to consider whether it needs fundamental change or whether the existing arrangements need to be added to with combinations of feed-in tariffs or what are called "capacity credits", other ways of directly incentivising investment in low carbon generation; rather than requiring the low carbon generators to make their investment on the basis of a calculation of what they think the electricity price at the peak periods and the carbon price and the fossil fuel prices will be 15 years hence; we think there is a problem of cumulative uncertainty in the current arrangements.
Mr Kennedy: I think it is very difficult to say in advance
Q231 Mark Lazarowicz: Many things will arise from that. I can see some point in what you are saying, but how would you respond to the point that what you are suggesting is really a major change away from the policy design to produce a carbon price and produce a cap on carbon emissions from what has been built up in the last ten years and so on? How would you avoid causing uncertainty for the future as to the long-term stability of the system; because if you start turning over a system which has been stable for ten or 15 years then the confidence that the new system or the hybrid system will also be long-term will surely be undermined?
Lord Turner of
Ecchinswell: We think you would create
more certainty not less certainty. You
would not be saying that you are getting rid of the EU ETS. You would be creating a price underpin within
the EU ETS. I think that could be
clearly understood and it could be clearly communicated that that is the policy
design you are doing. After all, you
have to realise that the EU ETS has not managed to create certainty out of its
present way of arranging. In the phase
one period, if you remember, the price effectively collapsed to zero for the
last year of phase one trading because the allowances were set too generously. In phase two the price has moved in ways
which almost nobody anticipated. People
did not in the forecasts last year anticipate that we would now be facing a
carbon price of, what, 13 or 14 at the moment, something like that, per
tonne. We have a system which - because
the levels are subject to political negotiation; because there is always
uncertainty of what the next stage will be; because there is uncertainty about
how tight they are given whether the economy is going to be growing rapidly or
in recession; because there is uncertainty about whether people really do
anticipate the future in the way that economic theory would suggest, or whether
the price today balances supply and demand today rather than supply and demand
over all the time periods within phase two and phase three - because of all
that uncertainty we have an imperfect system at the moment, and we think that
by introducing an underpin we will increase certainty. We think for the investors in low carbon
technology the fact that we and others a year ago were saying, "We think the
carbon price in 2020 might be about €50 per tonne; our best shot now is about
€25 per tonne in
Q232 Mark Lazarowicz: A last question if I may, but it is quite important. Could you just tell us: firstly, how would you envisage the underpinning system working; how would the underpinning actually happen; secondly, who would pay for the underpinning; and, thirdly, what kind of sums are we talking about being required to bring about the forward price?
Lord Turner of Ecchinswell: The key thing is that an underpin becomes much easier to do as you move towards 100% auctioning, because it is simply a reserve price within the auction; therefore, people who are buying at auction - and we ought to be heading to everybody buying at auction - have to pay that price. It essentially becomes a tax mechanism through that. It is more complicated when we do not head towards auctioning. What you would probably do is simply introduce it as a minimum price within the auctions; to begin with it would be an imperfect underpin because auctioning would only apply to a subset of it, and then it would become a more effective underpin as we headed more towards 100% auctioning. That is the way you would probably do it; rather than a central bank trying to intervene in the way that central banks occasionally try to do to manage the exchange rate, which of course can get quite expensive. Structured that way round it actually increases Government revenue, because it increases the revenue to Treasury and it also provides greater certainty to Treasury of future auction revenues, rather than Treasury being faced with uncertainty of future auction revenues.
Q233 Martin Horwood: Could I join the Chairman in welcoming this report; I think it is a phenomenally important contribution to the whole debate. In your work on coal-fired power generation, you seem to be having a vision where by the 2020s we will be generating power from coal with carbon captured storage or not at all. Is that broadly right?
Lord Turner of Ecchinswell: That is the essence of it. I think one cannot exclude the possibility that if you had unabated coal at that time you might allow some of it to run on a very small number of hours per year and it would simply be used to make up peak capacity in winter. Certainly you would be in an environment where we do not see a role for unabated non-CCS coal as a base load bit of the system from beyond the early 2020s; that is incompatible with the reductions in g/kWh that we think we have got to achieve.
Mr Kennedy: We see a big role for clean coal through the 2020s and from the early 2020s if we put the foundations in place now.
Q234 Martin Horwood: In terms of how those foundations are being laid at the moment, you have welcomed the Government's CCS competition and the revisions to it, but in the report you seem to cast doubt on whether the signals are strong enough. You say that for any plant not fitted with CCS there will be little or no role further into the 2020s, and that is a concern that has been raised in Parliament as well; that in effect there is quite a large loophole in the current competition arrangements that would allow a plant built now to continue beyond the 2020s without clean coal. Is that right?
Mr Kennedy: I think what the Government said in its draft proposals was there could be a possible limit, and it was very tentative, on generation from unabated coal through the 2020s. We are very clear, this should be a firm limit and that should be agreed in advance and be very clear to anybody who is thinking of investing in coal-fired generation.
Q235 Martin Horwood: You are confident enough in the technology to be able to say that that should be a firm planning assumption?
Mr Kennedy: You can look at it in two ways: we are confident there is not a role for unabated coal in the 2020s; so whether CCS comes through or not there is not a role for unabated coal. It looks like clean coal, certainly from a technical perspective, is doable. What we want to find out more about is the economics, and that is why we need to move forward with the demonstrations and we need to move forward with those quickly.
Q236 Martin Horwood: Looking at one of the scenarios the report paints, how likely do you think it is that the UK will have the sort of tripartite progress: 23gW of new wind; four CCS demonstration plants, both by 2020; and, the one I am personally less happy about obviously but is within the realms of Government policy, three new nuclear power plants by 2022? How likely are each of those to actually come to fruition, do you think?
Lord Turner of Ecchinswell: We think each of those is doable; they are completely doable on the 23gW.
Q237 Martin Horwood: How likely?
Lord Turner of Ecchinswell: I think they are reasonably likely. I am an optimist. We have set out the pace at which we have to build new wind, both onshore and offshore, and it is absolutely not an impossible pace. It is not out of line with what the Germans have done over the last 15 years, or the Spanish have been doing; it is not an absurd rate. It does need appropriate incentives but we think it is completely doable and therefore should be achieved. It is certainly possible for us to build three nuclear power stations; you may not like them but it is possible to do that from starting now and to have those operating by 2020; and we can certainly have the four CCS demonstration projects; none of it relies on gleams of technology in the lab where somebody says, "I'm going to develop this" but they haven't been developed yet. These are all things which work. In the case of CCS they work at a certain scale, but it is a matter of taking it to full engineering scale; but the chemistry of it and the physics of it are known. Nuclear power plants exist; windmills exist; these are completely achievable targets, we believe.
Mr Kennedy: There are some very clear things we set out in the report that have to happen to make this a reality. I think in the case of onshore wind the key issue is going to be planning: can we get enough of this stuff through planning and approved? I think on clean coal are we going to get the funding for the demonstrations? Are we going to have a plan for continuity - so an early review of the next phase in 2015 - which is really accelerating the proposal from the Government. I think on nuclear the key issue is to move forward with the planning framework, with the national policy statement, with the work of the infrastructure planning commission, with the regulatory approval of the new designs of nuclear reactors. If we can progress on all of those fronts then this does become very doable.
Q238 Martin Horwood: The biggest increase in capacity on wind is likely to be offshore, not onshore, is it not?
Mr Kennedy: About 50:50.
Q239 Martin Horwood: The infrastructure, for instance, in terms of the national grid and so on, is that progressing fast enough at the moment?
Mr Kennedy: In terms of the timelines there, there are two things that we have said have to happen on the national grid: first of all, there is a set of what are called "least regrets investments" that have been identified; those need to proceed, and we understand they will proceed in the next year depending on agreement between Ofgem and National Grid, so that is something we will be focussed on going forward; but they do need to proceed based on agreement next year. The second thing is, we need some new rules for accessing the grid, so that you have got wind generation and you can actually transport it to where the demand is; and again we have said we need a new set of rules to be agreed by next year at the latest. If we can move forward according to that schedule, again it does become very doable.
Lord Turner of Ecchinswell: I think those issues of both the policy framework for grid access and the infrastructure investment by National Grid to support offshore are absolutely examples of things that have to happen over the next year/two years and get on with it, in order to make possible everything else; because unless those are in place, obviously an offshore wind investor is going to say, "No, I've got to delay it because I can't have certainty that those are in place"; so they fall into the category of things that are key priorities over the next couple of years.
Q240 Chairman: They do raise a new set of issues. To get the capacity from the offshore wind that will be available on the east coast, National Grid are now proposing to erect a series of pylons over an Area of Outstanding Natural Beauty in my constituency; that is not an uncontroversial proposal and is likely to be fought tooth and nail by all political parties. So there are some practical difficulties. Just on the planning point, which is very important, a common thread running through a lot of this dialogue is that decisions taken in the next year or two are absolutely critical to the achievement of what we want to do in ten years' time. Should the IPCC be required to base its decisions on achieving at least the intended budget so that all planning decisions which have an effect on this outcome would have that as a sort of dimension they had to take into account?
Lord Turner of Ecchinswell: I do not think we have thought of that. Can we take that away and think about whether we need to shift around the ----- It is a matter of the balance of presumption in the inquiries. What has been already achieved is the idea that when you have either a wind development or a nuclear development you cannot fight it by going back to the basics of "do we need this for climate change" et cetera. That I think is a major step forward; it says that the opposition to these developments has to be on the basis that there are some extreme local effects which knock it out. I think there has been a sensible shift to preventing the ability every time when there is a windmill or every time there is a nuclear power plant to go back to the basics of "Why do you need to do this at all? Is there climate change?" et cetera. That is in itself a shift in the balance of presumption and the balance of allowable debate. I think that is something that we should probably track over the years - whether the changes that have already been made are adequate; or whether at some stage one should consider shifting the presumption even more so, so that there is a very strong presumption that if it contributes to the achievement of climate change there need to be very extreme circumstances that go against it. Can we take that as an issue for further discussion?
Mr Kennedy: We are required to look at the national policy statements, for example, on nuclear and whatever, and they do feed into the infrastructure planning process, and they should be consistent with meeting the carbon budgets. That is something we will be looking about going forward.
Q241 Mr Chaytor: Can I ask about the costs of meeting targets and budgets. Obviously you have revised conventional economic theory about major markets very considerably in this report. In your opening remarks you talked about the importance of new investment in transport, domestic energy, efficiency and renewable heat. What sums of money are we talking about; and where is it going to come from?
Lord Turner of Ecchinswell: Back in the December report when we looked at the cost in terms of GDP foregone from hitting either the 2050 target or the 2020 budget, we ended up with figures which were absolutely within the range of what Nick Stern had suggested: sort of, 11/2/2% of GDP sacrificed in 2050 to hit these targets, and figures for 2020 which were less than 1% of GDP. Those figures of course you cannot translate into, as it were, what does it cost in investment terms? They are basically saying that if you do this the GDP per capita, the income per capita, in 2020 will be, say, 0.5 % lower than it would otherwise be. I simply suggest one point of how to think about that. I think increasingly we actually know in the economic theory of welfare that these increments in GDP per capita do not necessarily convert through to human welfare and happiness to anything like the way we used to believe they did. Therefore, certainly if the impact is that an economy would previously grow at 2% per capita per annum and now it will grow at 1.9% per capita per annum, when you get to the end of that it is extremely unlikely that people will feel, "Ah, there's something gone wrong". What people will concentrate on are the specific things which make a difference to them. That is why, when you think about the cost, one then needs to think about: what does it require to do to the cost of electricity; what does it have to do to the cost of motoring; and that we did set out in the December report, because we will have, both through the support which is needed for renewable energy, some significant increases in electricity and gas prices; they will in different ways come through to a higher price of electricity and gas. I cannot remember exactly the figures. David, can you quote those?
Mr Kennedy: We had a figure of a 25% increase in the price of electricity and the price for heating, and that is the price as distinct from the bill. We have also said energy efficiency improvement, depending on what kind of a house you live in, could reduce your consumption by 50%. Certainly in some cases you could more than offset the price impact. Where that plays out, there is probably a bit of cost on average involved for households.
Q242 Mr Chaytor: Lord Turner, in your response there are two separate issues you are rolling up together here: one is the whole issue of GDP and how accurate it is as a measure of outcomes for human welfare. Leaving aside how accurately economists can predict into the future what the share of GDP will be, the other issue is: what is the impact in terms of prices, and in terms of Government spending in the first three budget periods? Because your point about electric cars, for example, assumes a considerable increase in direct Government subsidy to make the price affordable. Do we have some ballpark figures?
Lord Turner of Ecchinswell: That is not something we went through in detail in this report, but back in the December report we did have a chapter, chapter 11, on economic costs and fiscal implications; because of course for Government there are both expenditures in some cases, but there are also revenue streams. In particular, one of the most important revenue streams is the revenue stream from the auctioning of carbon permits which, by the end of this period if I remember rightly, could be in the region of £9 billion per year, or could indeed be higher if the electricity price is higher. Many of the costs do not fall directly on Government. If we increase the electricity price that falls on individuals, and then the issue, as David has outlined, is how far they can avoid that by improving energy efficiency. Some do fall on Government and, for instance, I think within what we have been suggesting two particular categories could fall on Government: firstly, specific support for technology like electric cars, to get them through this sort of chicken and egg problem of, "I'm not going to buy an electric car until there are charging points. I'm not going to put charging points in until there's an electric car". There is a role for Government in getting us through that. Secondly, support for energy efficiency in the home. Those are the two key areas where there is potential expenditure for Government. On the first one, Government has already allocated £250 million to support, and we have flagged that the figure could be of the region of £1-2 billion.
Mr Kennedy: It could be £1-2 billion which would support the purchase of the cars; the installation of a national network of charging points to support up to two million electric cars on the road by the end of the third budget period.
Q243 Mr Chaytor: In terms of domestic energy efficiency?
Mr Kennedy: The question there is not one of who bears the cost in the sense that this is a cost-saving thing so there is money to save. It is a question of who finances the upfront investment, for example, in loft insulation. Is it the household; is it the Government; or is it local authorities or energy companies who borrow on behalf of consumers? There we have not been definitive about what the appropriate solution is.
Lord Turner of Ecchinswell: It may be there that the role is loans rather than grants. The essential problem is that there are many people who have a home and if they spend £10,000 on it they would get a return of reduced energy bills in future which would be perfectly reasonable and be as good as putting your money in the bank, as it were; but that is not how they will think about it. They will think about it as "£10,000 that I haven't got today". So there is a crucial issue there as to the role which the Government could play either directly or in a facilitative fashion, essentially in creating financing packages. We have not gone to that level of detail or precisely what the alternative options are for Government in that area. Those are the two key areas of potential expenditure: electric car support and energy efficiency improvement in the home.
Q244 Mr Chaytor: Yesterday the report of Professor Ekins ----
Lord Turner of Ecchinswell: Yes, Paul Ekins.
Q245 Mr Chaytor: ---- of the Green Fiscal Commission suggests, from my recollection, that the current proportion of revenue from green taxes, which is 7%, should be doubled by 2020. Would that be a figure that you could identify with?
Lord Turner of Ecchinswell: It is quite useful for you to mention that report because I can perhaps usefully put right a false impression over the weekend where it was reported that I was presenting this report, and it got somewhat mixed up with the Climate Change Committee. This is a very good report by the Green Fiscal Commission, and I was one of four people who welcomed it last night and commented on it - the other three being one each from the Labour Party, the Liberal Democrats and the Conservatives.
Q246 Mr Chaytor: Not the Editor of the Daily Express!
Lord Turner of Ecchinswell: Yes, they did not welcome it. What that is, that Green Fiscal Commission Report, and I think it is a very useful thing to do, is to deliberately be radical, and to say: what would a radical rebalancing towards environmental taxes look like as a contribution to the debate. They have taken a scenario which would take environmental taxes, taxes on some category of environmental harm particularly to do with climate change, from 7% today - but their forecast suggests that under the existing tax regime that would in any case fall to 5% of our tax revenues by 2020 - and to make it 15%. It is 7% which would fall to 5%, becoming 15%, which then of course enables you on a revenue neutral basis very significantly to cut Income Tax and Employers' National Insurance. I think what they have done is illustrate what that could look like; illustrate that that would play a very major role, as it would, in reducing carbon emissions, and run through what the distributional consequences of that would be. I do not think the Commission is suggesting that the specific scenarios they have suggested are, "Yes, you've got to do that"; but I think we would see it as a very useful challenge of: should we be thinking about a quite radical shift in the basis of taxation? The thing which is particularly attractive about that is, we have often talked in the past about shifting from a taxation of good things, like employment - employment is undoubtedly a good thing; everything we know about human welfare says that unemployment is one of the worst possible things, so employment is a good thing - to taxation of bad things, like pollution. At various stages Government has said, "Well, we're going to do this and the good news is it's going to be revenue neutral because we're going to have a tax on landfill sites and your National Insurance has been cut". Of course, the trouble is two years later the National Insurance has gone up and they have said, "No, it's still been cut relative to what it would have been". The trouble is, when you try and do this balance in small amounts you do not generate the confidence that the offset is really there: my taxes went up on this side and they weren't cut on this side. I think what the Green Fiscal Commission has done is to suggest that maybe the way round this, to make it really believable to people, is to do it on a large enough scale where the increases in environmental taxes and the reductions in Income Tax or National Insurance are so big that they are visible; they do not get lost in the year by year movements, and therefore you get round the problem that I think we have faced in the past of a cynicism about this idea of offsets. I think this is an inherent problem for all Governments. As long as you try and do these offsets in relatively small amounts at the margin you will find it very difficult to convince people that the offset was really there. That is what they are trying to do. We will certainly look at those ideas and put them into our thinking going forward. I do not think we would agree with every one of the ideas there. For instance, there is an approach to car purchase tax which does not involve differentiation according to energy efficiency; and we certainly think if we are going to go down the route of car purchase tax or initial Vehicle Excise Duty Tax, as we are already, we should have strong differentiation between gas-guzzlers and energy efficients, and they have not gone down that route. There are some things we would not tend to agree with, but it is certainly an incredibly useful challenge.
Chairman: The Secretary of State is waiting just outside, but could we have just one final two minutes on energy efficiency.
Q247 Jo Swinson: Although the Government will point to all of the things - the £2.2 billion for energy efficiency, smart metres and so on that it is doing on housing - you have been very clear that they still need to have a step change and what is planned is not enough. Can you tell us what in the approach needs to change? When asked about the costs you said you do not have the details. Are you planning to work out a more detailed plan on how that can be done, or are you expecting DECC to do that?
Lord Turner of Ecchinswell: I think across all areas of policy the role of the Committee is to flag the need for policy enforcement, but we are not the detailed designer of policy and were never intended to be. I think the essence of what we need to do on energy home improvement is partly about cost and financing packages, but it is also fundamentally about creating one-stop shops. I think the biggest barrier to people seizing the opportunities in their homes - and I suspect many of us will know this individually - is we know there are things that we can do, if tomorrow somebody would walk through my door and for £500 write me the report on my house which says, "This is what you should do", tell me how much it would cost and then tell me, as a one-stop package, "These are the guys who are going to come and do it, and they're all going to do it in a two-week period", so you do not have two months of people doing this and people doing that, I would sign the cheque tomorrow without support. Other people with lower income may want financial support as well, but there are many people who would do it without financial support; and what that says is, one of the biggest barriers here is overcoming this information and organisation challenge. There are lots and lots of people knowing that they could do cavity wall insulation; they could do loft insulation; they know they would get a payback for it; they know they could improve their doors, their windows. It is the hassle factor of: where do you go for one person who is going to make it all happen et cetera. This is probably one of the most important things that Government has to focus on: can it play a catalytic role in bringing into being one-stop shop providers where you can go, find out what you can do for your home, get told the price, get told a financial support package and get it all done. I think that is one of the biggest barriers we face in this, rather than necessarily the cost itself.
Mr Kennedy: We have been very clear, it is a national programme that takes away the hassle from energy efficiency improvement. Who should lead that? Is it the energy companies? We have said, "No, it shouldn't be the energy companies. It is a job for Government".
Q248 Jo Swinson: Do you see the energy companies having a role?
Mr Kennedy: A delivery role in terms of getting people excited, getting people motivated and thinking this is not going to be a hassle for them, trusting whoever it is that knocks on the door, that is for the Government, not the energy companies. In terms of contracting the work, maybe the energy companies could have a role there.
Lord Turner of Ecchinswell: There is a problem of course that energy companies are the energy supply companies not the distribution companies. They do not necessarily have a continuous relationship with that house. There is quite a lot of churn in the electricity market as people go for new deals for electricity supply. I think this is an inherent problem and we have realised that it is more of an inherent problem, it is going to be even more of a problem as we deal with issues like smart metering and who owns the meter and getting that in. We need to create a mechanism which does not rely to the extent that we have relied on the energy companies which, as I say, do not necessarily have an ongoing continuous relationship with that household and that house. That is what we need to put in place.
Q249 Chairman: Thank you very much indeed. It was a very, very useful session from our point of view and we look forward to continuing to have a dialogue with you.
Lord Turner of Ecchinswell: Thank you.
Mr Kennedy: Thank you.
Memorandum submitted by The Department of Energy and Climate Change
Witnesses: Rt Hon Edward Miliband MP, Secretary of State, Department of Energy and Climate Change; and Mr James Hughes, Head of Carbon Budgets Team; Department of Energy and Climate Change, gave evidence.
Q250 Chairman: Good morning and welcome. Thank you very much for coming in. I rather felt in the light of the lead article in The Times that I should start with a sound engineer's question about asking what you had for breakfast this morning. You are not a meat eater at breakfast time?
Edward Miliband: I had some fruit but not as a matter of policy is the way I would put it!
Q251 Chairman: Do you want to introduce your colleague?
Edward Miliband: Yes, I do. Thank you very much, Chairman. It is a pleasure to be here. I have with me James Hughes, who is the Head of our Carbon Budgets Team. It is great pleasure to be before your excellent committee.
Q252 Chairman: Thank you. We are appreciative of your coming in. We have got a lot of ground to try and cover. We just had Adair Turner and David Kennedy from the Committee on Climate Change before us, of course talking about their Progress Report that was published two weeks ago. Do you think that the Low Carbon Transition Plan can deliver the step change that report is calling for?
Edward Miliband: Yes, I do and I want to be very clear that I agree with them, that we do need to step up the pace. I have been very clear about that, that was the reason for the setting up of the new Department of Energy. Climate change was a recognition that we needed to go further and faster on this low carbon transition. I think what is important about the Transition Plan - everyone knows the Government is good at having targets - is what this tries to give a sense of is sector by sector how we are going to achieve the targets. Some of the areas are more difficult than others, but it is a clear analysis, if you like, of how each area can contribute to meeting our carbon budgets. I think it is worth saying that, partly helped by this Committee, this is a world first to have carbon budgets legislated for and is part of the architecture of what we do. Also, and James may want to say something about this, having carbon budgets for each department is very important because the truth is the thing I have learnt about Government, Chairman, and I am sure something you have found is that if everyone is responsible for something, then sometimes nobody can be responsible for it, if you see what I mean. By allocating out responsibility, and that was a hard process, and we may get into some of the detail of that, every department has a direct interest in meeting what we are doing. I think both the approach and, I hope, some of the substantive policies contained in the Low Carbon Transition Plan will mean that we will be on track to meet the ambitious targets that we have.
Mr Hughes: Not to go into too much of the detail because you may want to ask some further questions later on, what we have done in the Transition Plan is set out, as we are required to do under the Act, both the proposals and policies for how we are going to meet the budgets that were set at the end of May. We have done that, I think, for the first time ever quite comprehensively. We have had a number of publications in the past from climate change programmes in the Energy White Paper which have set out some of the new policies, but here for the first time we have set out all of the policies that are going to help us to meet those budgets. As the Secretary of State was saying, I think what we have also got there is we have got for the first time this sharing out of responsibility between departments, for the small departments just in terms of their own operations and estates but for the larger departments sharing out the sectoral emissions between them. We are working currently with those departments in terms of drawing up what are going to be carbon reduction delivery plans which will be published in the spring.
Q253 Chairman: Will the Committee on Climate Change's Progress Report now involve making any change or review of the plans in the budgets in the Low Carbon Transition Plan?
Edward Miliband: Of the actual level of the budgets?
Q254 Chairman: Yes.
Edward Miliband: No. We are going to do a formal response to them in January as required under the Act, so I do not anticipate that but I do not think they are recommending changes in the actual level of the budgets unless you heard differently from Lord Turner. They have specific recommendations which, of course, we will look at on the question of banking of any overachievement, if you like, in the first budget period or in subsequent budget periods but my understanding is they are not proposing changes to the actual level of the budgets.
Q255 Chairman: No, but they are saying that
Edward Miliband: Yes, although we did not make a huge deal of this at the time, it is worth saying that on our plans that we set out in each of the budget periods we do exceed by some margin what is required. I think it is 44 million tonnes in the first budget period, so in that sense we are on course to overachieve. I think there is a couple of things to say about that. One is there is always a margin for uncertainty with these things. One of the reasons why the figures have moved in a more positive direction, according to the Committee on Climate Change, is to do with the recession which is undoubtedly true; it could move back in the other direction with higher economic growth. There is a whole range of other uncertainties. We are on course for overachievement. I think that is the right place to be. Secondly, it is worth saying also that we have taken a pretty tough line, as the Committee recommended, on the question of offsets and buying in offsets from abroad by setting a zero credit limit in the first budget period. We have set ourselves a pretty testing task. As I say, we will respond formally to them on the question of banking of any unused allowances in January.
Q256 Chairman: You would accept their recommendations about how the impact of the recession should be taken into account?
Edward Miliband: I think James may say something about this. There is a sort of disagreement about the precise detail of what the precise recession effect is, but there is no question that there is a bigger effect. To put this in a global context, it is worth saying that, according to the IEA, as a whole, the world will be emitting 2 Gw/t less in 2020 as a result of the recession. I think that is on a business as usual scenario, something like between 50 and 60Gt. There is no doubt that there is a recession effect. Do you want to say anything about the detail of that?
Mr Hughes: Just a couple of things. One is that the Transition Plan published in the summer includes within the figures there our own assessment of what we think the impact of the recession is, so that has been taken into account in the Transition Plan. The figure that we came up with in terms of the impact of the recession was not as large as the one the Committee has suggested in its report. That is partly because the Committee and ourselves have used different analyses and that analysis has used a different approach in terms of looking at what the impact of the recession might be. That said, I think clearly the decision on what the real impact of the recession is on the first carbon budget and what the implications of that might be in relation to the question of banking or not may need to wait until towards the end of the first budget period until we can assess what the actual impact has been.
Q257 Jo Swinson: We hear about this 2° rise figure. It is always mentioned in media interviews and at the despatch box. Do you think people would be surprised to know that even if the Government meets its plans and targets that there is still a 50% chance we will go over that 2° rise? Is that not an unacceptably high risk, given the consequences that more than a 2° rise could have?
Edward Miliband: I think that the science is incredibly challenging and the truth is globally and domestically politics has a job keeping up with the science. It is important because I know your Committee has talked a lot about these 2° to various of its witnesses, including I think Brian Hoskins and also Lord Turner this morning. My understanding of this is that we have already got 1.4°C in the bank, if you like, that is going to happen anyway. The prospects of keeping to under 2° are very, very challenging and in a sense that is the implication that I take from the Committee's recommendations and the recommendations that we adopted. I think they are right to say that the effects become more severe as we head towards 3°. In other words, that is the importance of 2°, as you head towards 3° and 4°, the weather effects become much more severe and they wanted to minimise those chances of ending up in that position. I think it is something like a 10% chance of 3° and a 1% chance of 4°, more or less, that is implicit in their figures. In a sense, I think that part of the challenge we face in public debate, to be completely honest, is to get across to people the pace of change and what is already inevitable in this. I suppose my job domestically and internationally is to try and go as far and as fast as we can and be as ambitious as we can.
Q258 Jo Swinson: I quite agree with you, politics does struggle to keep up with the science and that is challenging. What do you think the main barriers are to being bolder and taking a more precautionary approach, given even 10% of a 3° rise and what we know about what that would mean for the world? Are those barriers cost and affordability, technical feasibility or mainly political?
Edward Miliband: That is a really good question. I think it is a combination of things. If I think about this globally, there is a perception barrier that we face and, to be completely honest, I do not think we - and I use this collectively - the people who are the advocates for tackling climate change have been good enough at saying there is avoiding the nightmare and there is putting forward the positive vision. If you think about the debate in the United States, for example, that debate is sort of where we were some years ago in terms of coming to grips with is this a real problem? Is the science real? How are we going to tackle it? Is it going to involve a lot of cost? What are the costs of acting? In a sense, I think part of our challenge globally and domestically is frankly to put forward more clearly the potential prosperity benefits of acting, the energy security benefits of acting, showing we can deal with the fairness aspects of transition. In a sense, gloom-laden warnings have their role - do not get me wrong, I can do those with the best of them - but I also think we have got to do a far better job of presenting the positive. In a sense, that is what is going to persuade people. A Labour Party member said to me, "Martin Luther King did not say, 'I have a nightmare', he said, 'I have a dream'". In a sense, I think we need to do a better job of that. There is one final point I would make, Jo, which is about the global context of this, which is if out of Copenhagen we can show that we can have global emissions falling, not rising, by 2020, that would be a major success because once that starts to happen, ie emissions start to fall, people will think, "Actually it wasn't as difficult as we feared it would be and it didn't have as profound a problematic impact as we feared".
Q259 Mr Lazarowicz: On the question of
Edward Miliband: I think maybe it is sort of intrinsic to doing this kind of job
that you swing between despair and hope in these things. I feel more hopeful than I did. I feel like it seems to me that the debate in
Q260 Mr Lazarowicz: Can you also give us an assessment of the position of the European Union because, again, there have been some mixed messages. On the one hand, a reduction of a 95% on target was obviously a positive move. There were also some press reports yesterday about some Member States balking at the contribution required to the adaptation mitigation fund. Can you give us an update of the position with regard to the EU in the last couple of days?
Edward Miliband: We have the heads of
government meeting at the European Council at the end of this week and that is
a very important milestone. The Prime
Minister will be going and arguing strongly for a Europe setting out as clear a
position as it can, including on finance and his proposal on finance in June,
$100 billion a year of public and private finance by 2020, I think has been an
important milestone and benchmark in the debate. There are tough negotiations in this because
it is a hard time for developed countries to be making additional financial
contributions to developing countries or, indeed, to anything. There are some Member States who feel that
this is going to be hard for them to do, so I think it is sort of inevitable in
this that there are hard discussions and they are going on.
Q261 Chairman: Do you think that the
principle of contraction and convergence is likely to be discussed much at
Edward Miliband: I think probably not is the answer. I do not think that will form the basis of an agreement. I think that there is a sort of attractive justice element to the contraction and convergence idea. The complexity of it, though, is what is the point at which convergence takes place and what do we say about different countries' levels of growth at that point, GDP, how should we adjust for different weather conditions and all that? I think as a way of thinking about the problem and how you share out the problem, it is quite a good way of thinking about it. If you think about the US, they may be at 24 tonnes per capita at the moment but by talking about an 80% reduction, they are getting quite a long way down, not quite towards 2 tonnes per capita but towards a pretty low level of emissions. I do not think it will form the basis of this agreement, but it is an important thing in the background to be thinking about when we think about what different countries need to do.
Q262 Dr Turner: Ed, it is very heart-warming to hear that you have taken on board the principle of overachieving and built it into carbon budgets, the next carbon budget and sector budgets, that is very good, but I would like to ask how confident are you about succeeding in that, given the fact that we are certainly going to fail to achieve our current target of a 20% reduction by 2010?
Edward Miliband: Let me say something about this because this was a unilateral position
Q263 Mr Caton: Ed, you said in reply to the Chairman at the beginning that the Government does not intend to use offset credits to meet the carbon budgets. However, the carbon budgets order allows the use of EU ETS credits to meet the budgets and they contain a portion of offset credits. Are you concerned about the use of offset credits within the EU ETS and do you think it undermines efforts to reduce emissions domestically?
Edward Miliband: The way I would put it is that domestic action needs to be the backbone of what we do, because we know that by 2050 if the world as a whole, including leading developing countries, has targets for reductions there will be much less available in terms of offsets, so domestic action is very, very important in this. People talk about the 20% target for the EU and how much of it is domestic and how much can be done by offsets. It is worth saying that our calculations suggest that about 16% of that 20% represents commitments the EU has made on renewable energy, efficiency energy, et cetera, so there may be a rule that up to 50% of it can be met by offsets, but it is also worth saying that there are additional domestic European commitments as part of the 2020 package which take you towards the lion's share of 20%. On the specific question about the use of offsets, having said that domestic action is the backbone, I do not think it is wrong to use offsets, no, because I think the whole principle of cap and trade is that you can make abatement happen in the places where it is least costly. Frankly, and it goes back to my earlier answer to Mark, we are trying to get to a situation where we have significant sums flowing to developing countries. One of the ways, but absolutely not the only way because you need public finance as well, in which those funds can flow is through the carbon market and to offset some part of that. I do not think it is wrong in principle, I think that the use needs to be constrained and there needs to be proper domestic action if we are going to be on a path to the kind of reductions that all countries need to make.
Q264 Mr Caton: I guess the concern, and this is certainly what we have picked up from witnesses over the last couple of years, is that allowing offsets reduces the imperative to move to a low carbon economy in developed countries.
Edward Miliband: It should not do that. I have a half-sympathy with what you say, but
I think it should not do that. Let me
give a specific example. I had the
chance to go to
Q265 Mr Caton: I think certainly one witness I can remember did not argue against putting resources into the developing world to allow them to do this sort of thing, they just argued that offsets have this negative impact in the developing world. Could I ask another supplementary. The Government counts allocations rather than actual EU ETS emissions. Should it not be counting actual emissions, especially given that there is no direct national allocation of emissions beyond 2012? Will it make more sense to move to counting actual emissions now?
Mr Hughes: First of all, fundamentally we believe in the EU ETS and we see that
as an important part of decarbonisation, both within
Mr Caton: Thank you.
Q266 Martin Horwood: Can I ask one supplementary to Martin's questions on that before moving on to the vexed subject of coal. One of the other issues which has been raised about the ETS, and BIS particularly raised in the National Audit Office Report, which we have highlighted on this Committee, is the use of carry forwards and how those are threatening to undermine even the achievement of the targets in Phase 3.
Edward Miliband: This is a really important point. The potential of banking of unallocated
allowances, both in
Q267 Martin Horwood: That is very good news. The issue of coal: the Committee on Climate Change in its report has identified the risk that market investment is still pouring into fossil-fuel fired power generation. Do you accept that point is right and, therefore, the market for power generation in this country needs to change in quite a fundamental way going forward? If so, what are your expectations, hopes or even plans for making that happen?
Edward Miliband: The way I would put it is this, markets on their own will go for the least cost option, in a sense that is what they are good at. The least cost option at the moment is gas. That is why we need to build in a series of interventions - this is what I call 'strategic government' - to make sure that what I think of as the 'trinity of low carbon', which is renewables, nuclear and clean fossil fuels, are part of our energy future. On renewables, we have the Renewables Obligation. On nuclear, through planning reform and other things we are driving to get a report to make nuclear happen. On clean coal, frankly, which I think is fantastically important - and, indeed, I think your Committee wrote a very good report on this, which I think the previous Department disagreed with and I agreed with and, indeed, said so in my response, at least I hope that was clear - this is a technology which has been around for a long time but has never got to the scale it needs to get to. That is why we have proposed a levy to make carbon capture and storage happen and drive it forward. In short, I recognise what the Committee on Climate Change says, that we need to make the right interventions in the energy market to ensure we do not end up with high carbon lock-in and high carbon solutions, but we end up going down the low carbon route and that is what we are trying to do.
Q268 Martin Horwood: One of the clear interventions the Committee has recommended and where it thinks there is - if I can paraphrase them slightly - a loophole in the current arrangements for carbon caption and storage, is that you have not yet sent a clear enough signal that by the 2020s essentially unabated coal will play little or no role in energy power generation. The loophole which is in there at the moment is that it is providing the technology is viable, but Lord Turner in his evidence earlier on today made the point that it is not really about the technology, it is about the simple fact that unabated coal cannot form a part of our energy generation in the 2020s on any significant scale if we are to meet the 80% target.
Edward Miliband: I agree with Lord Turner on this. Let me try and explain where I see this as a
background. We had a policy which was
for building unabated coal-fired power stations. The establishment of DECC led
to a different policy, which has basically got three components. This was our proposal, which we are still
consulting on. First of all, any new
coal-fired power station has to demonstrate CCS on a substantial proportion of
the plant. Secondly, by 2020 we should
take a view about whether CCS is proven and then if it is proven these new
plants should have 100% CCS. Thirdly, if
it is not proven, and we have asked this question, what do we do then? We have said in our initial set of proposals
that we should have a presumption, there would have to be some kind of
restrictions in order to precisely meet the problem you are raising. If I can put it this way, I think the dilemma
or the needle we have to thread in this is we have got to find a way in which
companies will build, in my view, so that we can test carbon capture and
storage, and not just test it but make it work.
If we do not make it work, we will be failing
Q269 Martin Horwood: Is not the crux of it that an energy company needs to understand right now that if they are building an unabated coal-fired power station, come the 2020s the likelihood is they will have to close it down if they have not got CCS and that signal has not been given yet?
Edward Miliband: I would disagree with that. Under our proposals they cannot build an unabated coal-fired power station because we have said we have got to have abatement on a substantial proportion of it under our conditions. That is the policy we changed. That is the first point.
Q270 Martin Horwood: That was providing the technology was economically viable.
Edward Miliband: No. To be clear about this, we have said that on any new coal-fired power station a substantial proportion of it must have carbon capture and storage fitted. We have said 400MW. That is absolutely clear. We have said no more unabated coal-fired power stations. You are looking quizzical.
Q271 Martin Horwood: That is not quite what was in the Government's statement. It is interesting that the Committee reported only two weeks ago that that clearer signal has not been given.
Edward Miliband: The question they are raising is the question of full carbon capture and storage fitting on any new plant. It is worth saying this, just to be clear, I changed that previous policy, this was an announcement we made in April, followed up in June with a consultation and these are the three conditions we have set out for consultation.
Q272 Martin Horwood: That is a clear statement of it now. The cut of 2% of emissions on 2008 levels by 2020 by the power and heavy industry sector ---
Edward Miliband: Did you say 2%?
Q273 Martin Horwood: Yes, 2% of emissions by 2020, which is on 2008 levels. Do you think that is consistent with the Committee on Climate Change's vision for almost complete decarbonisation of power generation by 2030?
Edward Miliband: I do not recognise the figure of 2%. We have said a lot on the Transition Plan that we are going to go to about 40% low carbon generation of electricity by 2020 which compares with something like less than 10% at the moment. We are talking about a big change in low carbon generation. I do not recognise the figure you were mentioning.
Q274 Martin Horwood: I do not have my source immediately handy. Can you tell me what role you might envisage for emissions performance standards, which seem to be potentially a very important lever and one which is not used at the moment and could make a huge difference?
Edward Miliband: We think they do have a role. Going back to this coal consultation we are in the midst of, we have said that if CCS is not proven, we think the EPS could have a role. We also said it could have a role in giving expression to the conditions we have laid out. I think the EPS could have a potential role in relation to coal, but potentially more widely also in the 2020s.
Q275 Chairman: On this point about the new coal-powered stations: as you say, your very much improved response to our report, for which we are grateful, if I can just quote from it - we have not really discussed it this morning - "In summary, the consultation is proposing that any new coal-powered station in England and Wales should demonstrate CCS from day one on a defined part of its capacity". 'Defined part' means what sort of proportion?
Edward Miliband: We are saying at least 400MW of CCS on any new plant. It depends on the size of the plant basically.
Q276 Chairman: That 400 might be a very substantial proportion on the capacity or it might not be.
Edward Miliband: It is probably right to say it is at least 25% because you are likely to be talking about a 1.6GW plant. There is an important issue which you may not want me to get into on this, Chairman, where some people say, "Why not do 100% from day one?" The reason for not doing 100% from day one is we are testing a new technology which has only been demonstrated at a much smaller scale previously and we are also going to be charging consumers for the pleasure of this. Therefore, I think it is right that we drive forward CCS as far and as fast as we can, but we do so in a way which is fair to consumers as well as the environment.
Q277 Martin Horwood: I do not think the Committee was highlighting what you have to do on day one, what they were saying was the signal you give to the industry, that by 2020 something like 75% of the power stations' emissions being unabated is simply not going to form part of our energy policy. Therefore, if that is the case, it will have to close down.
Edward Miliband: That is not the signal we are giving them because we are giving them a very clear signal about driving forward CCS, about demonstrating CCS and about saying it will have to be 100% if it is technologically and economically proven. Also, we are saying, if CCS does not work our presumption would be there would be restrictions on it. The argument some people would make is if you were to say, "We're going to close down the plant in 2020", then people are not going to build the plant. That is the point people would make to you. People are not going to build a new coal-fired power station for five years, so we have to find a way in which we send a very clear message about decarbonisation and about CCS, but we also have to do it in a way which gets the CCS demonstrated.
Q278 Martin Horwood: Surely that is the nub of it then. If you are scared about them not building the plant, surely that is exactly what the Committee on Climate Change is saying. They say: "Whether or not CCS can be deemed economically viable, any conventional coal plant still operating unabated or even in large part unabated" - you can read - "beyond the early 2020s would only generate for a very limited number of hours".
Edward Miliband: Our proposals are exactly in-line with the Committee on Climate Change.
Q279 Martin Horwood: They do not think they are. If you read page 134 of their report, they think a stronger signal has not been sent.
Edward Miliband: I do not know whether you asked Adair Turner and David Kennedy about this, but I had a discussion with them this morning about this and they think our coal policy is in line with their recommendations because we have said, as the third condition, if CCS is not proven there will be limits on what can be done.
Martin Horwood: It may get down to exactly what the limits and how big the loopholes are, I guess.
Q280 Chairman: You just mentioned consumers, which obviously are of great concern to your Department, however, if we are going to have a higher proportion of green secure energy, it is unavoidable that the price is going to go up for consumers.
Edward Miliband: Yes.
Q281 Chairman: Protecting consumers cannot be a driver of our response to climate change. It may be a driver of social policy in order to minimise the impact of fuel poverty, but we cannot allow a concern about price to restrict what we are doing to reduce the emissions.
Edward Miliband: I do agree, except in this respect: we always have to be aware that
we have to try and make low carbon transmission happen at the least cost which
is feasible. I have been very clear, Chairman, and I said this when we
published the Low Carbon Transition, prices are going to go up. Our estimates are that the climate change
impact of what is in the Transition Plan is 6% by 2020 on energy bills and 8%
if you include previously announced measures. I was very clear about that because I think we
need to level with people about this. Also, it is important to say - and this
is important for the people who believe in this - there is no low-cost, high-carbon
future. In other words, simply going for
high carbon, relying on fossil fuels, opening ourselves up to increased demand
Q282 Chairman: One of the common threads in our earlier session was that the actions taken in the next two or three years are going to be critically important in achieving the 2020 targets and the budget cuts to 2022. If there appear to be still obstacles in the planning process, would you consider building into the remit of the IPC a requirement to have a strong presumption in favour of any proposals which appear to be necessary to achieve our climate change commitments?
Edward Miliband: That is an interesting point and when we publish our national policy statements in the next few weeks, I hope you will engage with them. We need to send a very clear message in our national policy statements about the need, not just for security of supply reasons, but low carbon security of supply reasons to make this energy infrastructure happen. The thing I have learned in this is there is a planning process aspect to this but, frankly, there is also a big public persuasion aspect to this. Persuading people about renewables, which are not popular, persuading people about nuclear - I am sorry to say that in front of some Members of this Committee - which is not popular, persuading people in relation to clean coal, which is not necessarily popular, I think the planning is important. I would be interested to have your comments on our national policy statements when they come out, but I think the persuasion part is equally important.
Q283 Dr Turner: The Committee on Climate Change suggests that the Government is relying on markets to drive the transition to a low carbon economy and that any such confidence in markets to do this is misplaced. How do you respond to that?
Edward Miliband: I think you need both. You need markets because, frankly, we have got some £100 billion or more of investment that we need to make this low carbon energy happen and it is not going to come from government. A lot of it is going to have to come from the private sector and that is going to come from markets, but you need a very strategic role for government. Frankly, I think the idea of a markets-only energy policy is not going to work. I have tried to say that very consistently since I got this job. I do not mean this in a party political way at all, but Lord Lawson gave an important speech in the 1980s about his approach to energy policy, which was essentially talking about the way in which markets can deliver, but we know that whether it is security of supply and the mix of gas and other fuels, low carbon or price, markets on their own do not necessarily deliver on any of those, that is why you need a strategic role for government, so I agree.
Q284 Dr Turner: Quite. There are limits to the signals or market drivers which are in place at the moment. Carbon price is very weak and the ROC system has limited effects. What thoughts do you have about putting market drivers in place through government policy which can direct the investment into low carbon technologies?
Edward Miliband: The most important thing we can do for a robust carbon price, and I
agree that we need a more robust carbon price than we have, is to get an
agreement at Copenhagen If the EU can
move from 20% to 30%, we will have a more restrictive ETS regime and,
therefore, a higher carbon price. I do
try and say this to people. There is a
very strong economic case for
Q285 Dr Turner: The Committee on Climate
Change favour unilateral
Edward Miliband: My preference is for
Q286 Mr Chaytor: Secretary of State, there is still a series of interventions which you think are necessary. To what extent has government's capacity to intervene in a market failure of energy policy been limited by the excessive intervention which has been necessary in the other market failure in the financial services industry? The money has been spent in propping up the banks and there is not going to be much more left to develop electric cars or whole-house domestic energy efficiency policy on a national scale, is there?
Edward Miliband: You are asking a very important question. It would be wrong for me to pretend that the economic situation somehow means it is as easy to get money for spending on climate change issues as it would otherwise be. It is very positive that, despite the difficult times, the Chancellor found £400 million of public finance in the Budget to help us develop our offshore wind industry, our marine industry, various other aspects and also through the ROC money to support offshore wind in particular. We have also got a huge amount of money in the system for ROCs. We have got the levy to support clean coal, which is important. In a sense, it is clearly unarguable that more difficult fiscal times make it more difficult. The only other thing I would add about this is in the last year or two the debate about the environment has changed in a very positive way in the sense that people now see green jobs as part of our future economy and I do not think they did two years ago in the same way. Part of our job and task as politicians is to articulate better what it means in practice to get the green jobs to come here, but I think there is an opportunity in thinking about the future of our economy and an active industrial policy that we need to make sure we have low carbon jobs here. Overall, it makes life tough, but I think there are some opportunities.
Q287 Dr Turner: The Committee on Climate Change's progress report says that currently we have been improving energy efficiency at 0.5% per annum and suggests that we need to move that up to 2% or 3% per annum. That is a huge increase in the first three carbon budget periods. To what extent do you think direct government investment is going to be necessary to bring about that six-fold increase in energy efficiency?
Edward Miliband: Direct government investment can always play a role in these things, although here is a real answer in relation to energy efficiency, which I think you, as someone who is an expert on this subject, will know. The truth about energy efficiency is it pays to do it, but the problem is the upfront costs. The task is to spread those costs over time, not over the time that someone lives in a house because that might be eight or nine years and is probably not enough time, but to spread it over a longer period so the repayment is connected to the house, not the person. Also, it is to find ways in which I think the private sector and others, local councils maybe - that is part of our proposals - can come in and provide some of that upfront finance. Given the scale of the challenge, it is going to be very difficult for government to provide all that upfront finance. Of course there are things we do through Warm Front, through, for example, the CERT Obligation and, as part of our home energy efficiency plan, we are looking at what role the CERT Obligation might play in the future and how that could help finance some of these changes we need to see. Essentially, you do need to make this a viable private sector business if you are going to get the kind of step-change we need as well as government playing its role.
Q288 Dr Turner: On the question of upfront finance for domestic energy efficiency, given the state now owns wholly or partly an enormous proportion of our banking industry, why are the publicly owned banks not selling green mortgages?
Edward Miliband: I think green mortgages, dependent on what way you want to put it, 'pay as you save', can be part of the answer. I have to say, because I have looked at this, the experience with green mortgages so far has not been successful in the sense that I think the Co-op - which I think is a great organisation, there is no disrespect to the Co-op - have had a green mortgage which has had an extremely low take-up. There are bigger barriers that we face candidly in this. There is a direct financial barrier we face, which I have tried to explain how I think we need to get over that, and that is going to need some changes in the way we think about this in terms of this longer time period of payback; that is important. There is a change aversion which people understand - I am sure we would have it about our own houses - about the kind of change that is going to be required, which we need to work out how we overcome. You are right that the banks can play an important role, I think they will have to play an important role, but it goes beyond that in terms of the scale of the challenge.
Q289 Dr Turner: Finally. on electric cars, who should pay for the infrastructure?
Mr Hughes: What the Government is doing at the moment is putting down some seedcorn money to get cities and regions to look at trialling some infrastructure. The Government has found about £30 million, which was announced recently under the Plugged in Places programme. Before the end of the year they are going to be announcing where that money is going to go and where that infrastructure is going to be built.
Q290 Dr Turner: It would be geographically located, individual towns and cities will have their own local infrastructure.
Mr Hughes: We are looking at about three to six cities. That will be the start and we will see how it goes after that.
Q291 Chairman: Can we move on to the management of carbon budgets. Is the Treasury going to have a role here?
Edward Miliband: Absolutely. Nothing ever happens in government without Treasury co-operation. They are enthusiasts for the system, not least because they see that on the issue of the government estate there are big potential savings to be made. They are going to play a very important role in the system. The way we see it working is as part of spending reviews - the spending reviews take place probably every three years and this will be a very important part of that process - and monitoring, obviously monitoring of how people are performing in their carbon budgets will take place on a continuing basis. The Treasury and DECC will play a very important dual role in this process.
Q292 Chairman: If they are doing that together, will they be sharing some responsibility for delivering the reductions, and can we expect to see their tax policies targeted more accurately towards encouraging the necessary steps?
Edward Miliband: I feel I will get vaporised if I comment on Treasury tax policy! The Chancellor has to maintain his discretion on this, but I have talked to him a lot about the system of carbon budgets, he is very personally committed and the Treasury institutionally understands the importance of meeting these carbon budgets. Obviously taxation is one of the instruments they have to meet it. Their centrality in this is very important. Again, it goes back to what I said at the opening, the fact that we now have - the first country in the world - financial budgets, departments have financial budgets but they also have carbon budgets, I think is part of the culture change we need in Whitehall and elsewhere.
Q293 Chairman: Are sufficiently senior people in each department going to be held responsible for delivering individual departmental carbon budgets and their plans?
Edward Miliband: Do you want us to comment on the seniority or otherwise of your equivalents!
Mr Hughes: First of all, I should say within DECC we have set up a team that is going to be taking forward the management of the carbon budget. We have specific individuals who are account managed with the main departments and working with them in terms of helping with capacity building, but also helping them with the development of their carbon reduction delivery plans. Also, we have written around to all departments and asked departments to nominate a senior responsible officer - that is quite often at board level - who will be responsible for making sure the delivery of those departmental carbon budgets is seen through. We are going to be taking that forward, certainly through the Directorate General within DECC, which does domestic carbon emissions and meeting with opposite numbers to make sure they are all helping to deliver on this agenda. Certainly so far everything is on track for delivery of those plans in the Spring.
Edward Miliband: One thing to add, Chairman, is I do not want to pretend that this is a system which will not undergo a sense of trial and error. We have devised a set of carbon budgets with other departments on the basis of direct policy influence, but then you have got to have the questions on indirect influence. BIS, for example, does not necessarily have direct control over everything business does, but in the carbon budget regime takes a significant share of emissions from business and the workplace. The Department for Transport has an important role, but obviously that is shared by the NHS, which is important because people travelling to hospital is a big issue, schools, et cetera. We have had to factor all that in to the process of devising and allocating these budgets. Experimental sounds a bit unfortunate, but it is a pilot, not in the sense that we are going to abandon it but in the sense that we are going to have to learn as we go along as to how this system works. There is also the question of the impact the department's performance has on the judgments that are made and if you have to buy offsets, where do they come from and if you have to buy credits, who pays for them and all that.
Mr Hughes: One of the things this Committee will be very concerned about is obviously how effectively they are monitoring progress. This is something which has come up in the context of the report the Committee on Climate Change provided as well. What they have done in the context of their report is to set out what the indicators are and the milestones against which they will look to see how government is making progress; in the same way within the Department Reduction Delivery Plans will be looking to agree indicators and milestones in that context as well. We will be looking at what the Committee on Climate Change has suggested are going to be their way of measuring things. Obviously it will be a much more rigorous process going forward to make sure we really do appear to be on track to meet our carbon budgets, not just in relation to what do the actual emissions reductions tell us, because they are a year or two behind, depending on whether we are talking about provision or actual, but do we look as if we are on course, are we making the right decisions at the right time.
Chairman: Our experience in looking at the Greening Government Agenda is there was an enormous variation in the performance of different departments. A lot of that reflects the priority which individuals within those departments attach to these particular goals.
Q294 Dr Turner: I was going to ask whether
your own appreciation of the gravity of climate change and the urgency of
emissions reductions was shared across all
Edward Miliband: To a man and woman, Des!
Q295 Dr Turner: I do not believe that!
Edward Miliband: The whole of
Dr Turner: I will not press you any further on the Treasury!
Q296 Chairman: Is there any particular action you think is called for on the Government's part in response to the Committee on Climate Change's progress report?
Edward Miliband: To be fair to it, and maybe to us, we need to study it properly and come back on that. I will say, I do think the Committee on Climate Change is not always necessarily comfortable for government but, as you and I have discussed on other occasions, it does play a very important role in holding government to account. I welcome the characteristically wide remit they have taken up.
Chairman: We have managed to dig up the reference in the Low Carbon Transition Plan - page 52 - to the 2% cut in emissions, but we will write to you about that point. I would like to establish that we did find the reference in your own document, so it is there. Can I say thank you very much indeed for coming in, it has been a very useful session and we look forward to a continued dialogue.