CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1878-i

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

Low-Carbon Growth Links with China

Tuesday 6 March 2012

Professor Samuel Fankhauser, Professor Trevor Davies and Professor Corinne Le Quéré

Nick Mabey and Felix Preston

Baroness Bryony Worthington, George Yu and Richard Baron

Evidence heard in Public Questions 1 - 69

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 6 March 2012

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Ian Lavery

Dr Phillip Lee

Albert Owen

Christopher Pincher

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Professor Samuel Fankhauser, Grantham Institute, London School of Economics, Professor Trevor Davies, Tyndall Centre, University of East Anglia, and Professor Corinne Le Quéré, Tyndall Centre, University of East Anglia, gave evidence.

Q1 Chair: Good morning. Thank you very much for coming in. We will just crack straight on. We have about 40 minutes, I think. We have two other panels of witnesses we are seeing later on.

As you may know, quite a few members of the Committee were in China last month and had some useful exchanges there. There is obviously a great deal of low-carbon activity taking place in China now, and a great deal of interest-in my judgment considerably more interest than there was even four or five years ago. They seem to be very much more focused. Where do you think the greatest scope is for co-operation-hopefully, for mutual advantage-between the UK and China on this whole agenda?

Professor Le Quéré: I think there is recognition that the UNCCC process is going rather slowly at the moment, so the benefits are in bilateral collaboration. The UK is really leading in international negotiations, but the UK’s emissions are relatively small. China has very big emissions but it is not joining in the international negotiations, so I think if the UK can develop a bilateral agreement with China-I have a few ideas how that can happen-then there are benefits to both countries.

Professor Davies: I think there is scope in some areas on the basis of our experience, particularly in the area of building. As you will know, there is an enormous urbanisation programme. In many of the buildings the energy standards are relatively low by UK standards, although they are increasing, and some of our work where we have collaborated around real projects could be of significant benefit to the UK and to UK businesses.

Professor Fankhauser: Let me add one or two points. Some of these areas of collaboration are predictable; some are perhaps a bit more surprising. Among the surprising ones that I deal in, in my work at LSE, is collaboration on policy. The Chinese are very interested in the way the UK has structured its low-carbon regulatory framework, with the carbon budgets, with the Climate Change Committee and so on. The Chinese are also very interested in carbon trading and want to learn those policy lessons, so that is clearly an area where collaboration is possible. Another area where collaboration is possible is probably research services-the intellectual side of the low-carbon economy-just because the UK is a service-based, research-based economy; but then there are the more manufacturing areas, industrial areas, which are a smaller part of our economy, but a large part of the Chinese economy. In some areas the UK has perhaps a comparative advantage-in engines, for example, aeronautics, the Rolls-Royces of this country-where collaboration also is possible.

Q2 Albert Owen: I did not go to China last month, but I did go about four or five years ago and I went to some of these manufacturing areas that you talk about and, quite frankly, some of the Chinese officials were saying, "We can’t learn much from you in Britain because you messed up, albeit a long time ago, and you are only a small player." You have just mentioned we are a tiny population with tiny emissions. What is the official line from China towards Britain? Do they see us as interfering or do they see us as genuinely a nation that can help?

Professor Davies: There is genuine interest in our experience. They do want to learn from our mistakes. The UK is regarded as one of the leaders in terms of policy development, and certainly we and, I know, LSE have been involved in discussing training courses, where the thrust from organisations like the Ministry for Environmental Protection has been in learning from our policy experience. It takes a long time to build up trust, and if we are going to have an influence, to be able to impart our experience on policy, we clearly have to do it by working directly with Chinese colleagues, rather than assume we can go initially at high level. One way forward might be to evaluate UK policy in collaboration with Chinese colleagues.

Professor Le Quéré: I think the Chinese see the British as very inspirational because Britain was the first industrial country, and the Chinese see that Britain can provide some leadership for being the first post-industrial country as well. One area where Britain can lead is international negotiations, as I mentioned before. I think there is a problem both in the UK and in China in terms of national policies with respect to targets. In the UK, the targets are based on territorial emissions, which are emissions that are only produced in the UK, but they do not account for consumption emissions, which are emissions from products produced in China but then consumed in the UK, and that makes a huge difference in the budget. In China, the problem is that the targets are not absolute targets for carbon reductions, but targets for carbon intensity. So both countries have a problem with respect to national targets, and it would be possible for the UK to say, "We will go consumption emissions if you go absolute emissions in your targets," and thus provide leadership in the international scene for negotiations.

Q3 Sir Robert Smith: Clearly on the policy development engagement, the benefit would be China, as a major player in the world, being able to engage more effectively in the policy framework. Would there be any commercial benefits to the UK of such an engagement?

Professor Le Quéré: If we can grab the opportunities. In China, things go very quickly and in the academic environment we constantly face the situation where there is a possible project of benefit to us but it has to happen straightaway-next month people have to be in place. If there is a very big policy oriented for low-carbon development, then people from the UK have to be in place in China to grab the opportunities as they arise. The opportunities do not come to us. We have to go in place and develop them in the territory.

Q4 Chair: What do you think the benefits are to the UK of doing this?

Professor Fankhauser: There is an almost flippant answer to that, which is there are very few places on the planet that double their GDP every 10 years and grow at 7% annually, and that is the size of the Chinese economy. Just in sheer demand for goods and services, whether it is low-carbon or any other type of commodities, it is very hard to ignore China. The trick is to find the niches where the UK can have a sustainable comparative advantage, not just a temporary comparative advantage.

Q5 Chair: Where do you think those niches might be?

Professor Fankhauser: We have done some analysis at LSE. In a sense, the way we thought about it is that there are two factors that have to come together for the UK to be sustainably good at something. The first is that we have to have a good starting point. Today you can already see evidence of comparative advantage and you can measure that with the share of exports, for example, that the UK has relative to the rest of the world. Secondly, one would need evidence of green innovation-the ability of UK firms to come up with new products that are genuinely low-carbon and genuinely green, and you can measure that with things like the number of green patents.

If you put those two together you find a pattern. The first thing you find is that the UK is much less strategic than China in combining those two factors. The Chinese are quite good at going green in areas where they have a comparative advantage. In the UK it is far more scattered, but there are some areas where the two come together: I mentioned aircraft engines before, but there are some surprising things like mining equipment, mining machinery, agriculture and forestry machinery. Those are the sectors that jump at us from the data. The bit we have not done yet is to go out to talk to those industries and dig a little bit deeper and see what that stuff means, but some of them are intuitive. We know Rolls-Royce and the Midlands manufacturing base are very good at what they are doing. They are increasingly green, so you can see areas of comparative advantage there.

Professor Davies: There is a hunger for low-carbon innovation in China, and I think the UK does have a good record in low-carbon innovation, so an attractive approach would be to partner with China in certain areas, such as mining equipment and building, to develop the innovations together, to bring them to market in China-a very, very big market-and to plan for continuing investment in British R&D to continue these low-carbon innovation developments.

Q6 Dr Whitehead: When a number of us were in China we talked about, among other things, the National Energy Administration in China. We were told that the actual policy analysis and development arrangements within the administration look pretty limited. Is that your understanding in terms of what resource China is putting into low-carbon policy development?

Professor Davies: My apologies, I didn’t hear that very well.

Dr Whitehead: Sorry, I will paraphrase it. It was rather a long question.

Professor Davies: No, it is a question of my hearing.

Q7 Dr Whitehead: When a number of us were in China we talked, among other things, about the capacity of the Chinese National Energy Administration, for example, to deal with issues of policy formation as far as climate change is concerned. Is it your understanding that there is potentially an issue with the extent to which they are genuinely able to work on policy development in, for example, the 12th plan?

Professor Davies: That does not surprise me. There is an issue of capability generally in a number of low-carbon areas, including policy, which is why I think it is an attractive prospect that this country could work in collaboration with China over policy development.

Professor Fankhauser: There are two ways of looking at that. I am not close enough to judge just how big the capacity is, but one way to look at it is the Chinese policymakers’ appetite for learning and the interest in understanding this issue, and that appetite is really very big. That is something we see almost daily, certainly weekly, at LSE. We are approached by Chinese groups who want to know, want to learn and want to be taught, so the interest is certainly there. The base level of capacity is perhaps low, but I think they are on a very steep learning curve with a lot of enthusiasm to learn.

Professor Le Quéré: There is also a big disconnect between the policymaking and the monitoring of the policies themselves, which is far more difficult. Policies tend to be done by the central government but are implemented at the provincial level, and to monitor what is happening there is very difficult to do. We had a discussion with the Chinese Academy of Transportation and they did not know how to capture the emissions from transportation, for instance, in their intermediate-sized cities. This is an expertise that we have in the UK. We are able to state the emissions, breaking down by sector, how we monitor them and what sort of data we need, and we can bring this expertise on board to China.

There is also an issue that things are going extremely fast in China. The cities are growing very fast and the policies are developing equally fast, so it is very difficult to keep up with the governance, with the policies they have locked at the central level.

Q8 Dr Whitehead: They are looking at-I am talking about policy from the centre-drafting a climate change law. I appreciate the issue that we looked at in terms of the transmission of measures relating to the law and what the provincial administrations may do about it-for example in the 11th programme, I think, reaching their intensity targets by closing certain factories down for several weeks. Clearly they are looking for far more sophisticated ways of relating policy to implementation. What do you think the UK could best do to support and develop those sort of measures and their implementation in China, particularly in terms of the development of a climate change law?

Professor Le Quéré: I think the UK capacity in these areas is very important. We have a lot of information-a lot of model-based information-and the systems and infrastructure can be modelled in the UK to assist the policy development and implementation. China has a really big hunger and need for that sort of information.

Professor Fankhauser: In terms of the knowledge base that we have in the UK-the number of experts, the models, the policy experience-the capacity is clearly there to engage with China and do some larger scale teaching. The question is more one of the channels through which that teaching happens. There are probably bottlenecks in terms of making sure that the UK expertise finds its way into China. I think the Foreign Office does a very good job in China. They keep inviting us over there and we do talk to large groups of people. The problem is not necessarily the expert base in the UK; the problem is, despite the FCO efforts, to channel that expertise into China.

Q9 Dr Whitehead: I was just thinking of the Prosperity Fund of the FCO, which has been supporting Chinese learning visits, for example, to the UK, and the development of a 2050 pathways calculator. Do you have any evidence of the effectiveness of those sorts of arrangements, or any feedback on how those are working?

Professor Fankhauser: I can only give anecdotal evidence, as nobody has done a proper evaluation of those programmes to my knowledge. The anecdotal evidence is that these things are really of interest to the Chinese, they are being used, and you get very detailed, very concrete questions or tiny little technical queries that somebody asks and would only ask if they had put effort into understanding the tool and the model. We get a lot of that sort of level of questioning.

Professor Le Quéré: One way to improve the efficiency in these instruments would be to align the funding opportunities in China and the UK at the same time. We have found that the Chinese will get funding opportunities through the FCO and through other means, and they get projects built up that depend on our expertise and we have the difficulty of aligning funding for developing projects with them. If our funding is rejected in the UK, submitted in parallel to the Chinese, it damages the relationship rather than helps. For the FCO and for other funds, if this was made more strategic-aligning a fund in the UK and a fund in China for working together, both countries chipping in their part of the funding-it would be far more efficient.

Q10 Albert Owen: Professor Davies, you are co-director of a centre that has established a partnership with Fudan University in Shanghai. What were the motivations for this, and can you tell me what the partnership has delivered to date?

Professor Davies: There were a number of motivations. One is that with China then about to become the biggest greenhouse gas emitter, clearly local decisions, local knowledge, local research within China and decisions made in China were going to impact the world. From a research point of view, there are some very interesting academic questions to be asked, which would have knock-ons to the real world, around behavioural differences, the role of behaviour change around low-carbon innovation in China. From a more prosaic point of view, there is the fact that there are large R&D budgets available in China, and the prospect of being able to lever funding for collaborative work-notwithstanding the point that Professor Le Quéré has just made that if the funding opportunities are not aligned and if they are not aligned over some continuous period of time, then that non-alignment can be positively damaging rather than just neutral.

Q11 Albert Owen: What have you delivered to date? What has the partnership delivered?

Professor Davies: It is still in its early days, but it has delivered some existing collaborative research programmes, funded mainly from the Chinese side. Had there been a little bit more funding from the UK side, that would have released even more funding from the Chinese side. We have existing programmes around high-emitting groups-the fact that there is a group of increasingly influential people in China who will drive opinion and possibly decision-making in China. We also have some other research-based programmes around nitrous oxide emissions and water security and management, and we are about to get off the ground a collaboration on new energy materials with one of the Chinese national key laboratories. That academic activity has also led to a collaboration with one of the more commercially oriented parts of Fudan University, which is an enormous university. This is to do with the design, development and delivery of low-carbon buildings and possibly low-carbon research parks in China, again of a massive scale. We are currently in the early phases of this, but we are involving UK companies in some of this work-at a relatively modest level so far, but there is real benefit to UK business, and we hope that that greater benefit will be realised over the next two or three years.

Q12 Albert Owen: When you mention funding, you are not just talking about Government funding; you are talking about attracting it from industry as well, yes?

Professor Davies: Yes, Government and industry funding.

Q13 Albert Owen: Do you honestly feel that it is more beneficial to Britain if these partnerships exist that facilitate, in the way that you have said, other things happening, or if Governments have a direct link with China themselves? Why should we channel it through establishments like yours when Governments could have direct contact?

Professor Davies: It is important, particularly in the area of negotiations, that the officials-the people who do the work, the people who do the monitoring, the people who do the assessment and the people who do the groundwork for negotiations-work together and there is a level of trust building up. One of the reasons it has taken a long time for us to come to this position in our relationship with Fudan-we have been working on this for three or four years-and with some other universities is the necessity to build up trust. I think that trust needs to be deep and it needs to be quite expansive.

Q14 Albert Owen: In your opinion, should there be individual universities having contact with each other, or do you think there should be a British delegation promoting Britain out in China as much as getting this research? Are you not going to be in competition with other universities for funding, for instance?

Professor Davies: Yes, of course.

Q15 Albert Owen: Do you think that is counter-productive in some ways?

Professor Davies: To build up trust and to develop active, vibrant research programmes, some of which would lead to commercialisation opportunities, I think it is inevitable that that has to start off on an institute-by-institute basis. That could easily be-or could conceivably be-within a framework. To come to our own example, the Fudan Tyndall Centre, we are also talking with other top research centres in China about the prospect of building up a mirror Tyndall Centre consortium in China. In the UK it consists of eight universities, and I think a similar arrangement in China has a number of attractions. Clearly, if that were in a framework of an interdisciplinary research programme, supported Government-to-Government, then that would be helpful.

Q16 Albert Owen: Moving on to the Grantham Institute, you have advocated a China research group within DECC. How do you think that would work and what do you think it would achieve?

Professor Fankhauser: The idea behind it was that China is one of maybe two countries that can have an active influence over global greenhouse emissions; the US is the other. It therefore makes sense to engage with China in particular, to understand China, to understand Chinese emissions, and to understand the potential of how quickly those emissions can come down. It is a question that you get asked a lot: what is the point of the UK having all those carbon targets if the world does not follow? The answer to that, in a sense, is that through example the UK can leverage other countries to do similar things, but that does not happen on its own. That needs a certain amount of engagement; it needs a certain amount of understanding what the other side does and how the other side ticks.

Q17 Albert Owen: Why do you think DECC is the best place for it? That was the crux of my question.

Professor Fankhauser: It could be in the Foreign Office, it could be in DECC, it could be in any number of places. Our reading of the situation-you will have probably a better sense of the institutional environment-is that a lot of what needs to happen requires technical skills. It requires an understanding of greenhouse gas and energy issues, as much as it requires an understanding of China issues.

Q18 Albert Owen: A difficult question for you: do you think that expertise exists within DECC?

Professor Fankhauser: I would be worried if it did not exist within DECC.

Albert Owen: Okay-fair question, fair answer.

Q19 Dr Lee: When we were in China I was quite struck by how individual academics were probably the most open people that we met in conversation, and yet the people to whom they were essentially answerable were the most closed people that we met. I remember a fantastic meeting at the NDRC; the kindest way I can describe it is that it was dry. I note the UEA submission says with regard to intellectual property that, "China intends to strengthen its law applying to domestically developed IP. However, it is currently uncertain as to whether this will extend to foreign entities operating in China". Then later on you say that the main thrust of your representations is, "The dividends of supporting university capacity building and knowledge exchange between the UK and China, research, knowhow, and the commercialisation of the same". I guess what I am saying is that no Chinese citizen has ever got a Nobel Prize for science. Their education system has a history of being based on plagiarism and rote learning. Can we trust them?

Professor Davies: A Chinese scientist has not won a Nobel Prize yet, but I think that with the enormous funding going in, Chinese science it is becoming stronger and stronger. It is actually very good in some areas. IP will continue to be an issue. My own view is that a good way of approaching this is to work in genuine long-term partnership with Chinese institutions, so both have a significant stake in the development of a piece of science research and also in the commercialisation of that research. One thing that we are exploring on a very small scale is the notion of a low-carbon innovation fund. We have some experience of that at UEA, where we have identified, managed and funded some rather innovative partnerships between a number of UK universities and business.

Q20 Dr Lee: Yes, but are you confident that, having used British money, be it taxpayers’ or private income, you are actually going to get a return on that? At the NDRC, we had to endure one person saying that she will not entertain any foreign agency inside Chinese borders checking on their environmental standards. Those things do not go hand in hand, do they?

Professor Davies: We have also had meetings with the NDRC, together with Chinese colleagues, and they have been apparently open and welcoming and said that they would be very interested and open to advice from the Fudan Tyndall Centre. It is important to have Chinese academics involved, rather than British or any other country’s academics or Government officials working directly with NDRC. It is partnerships with the Chinese which I think are important.

Let me briefly finish the point about an innovation fund. If it is possible to develop partnerships of UK universities and UK businesses with Chinese universities and Chinese businesses in innovation and developing particular bits of technology and then commercialising them together, that is a possible way forward.

Q21 Dr Lee: In theory, that sounds absolutely fantastic, but my point is: where is the evidence that we are not just suckers in all of this?

Professor Le Quéré: On the issue of trust, we-at least I-have had the same experience as you did. At the level of the academics there is a lot of trust and then as soon as you go above it it becomes quite confusing. Who do the Chinese trust? They trust their own academics; they do not trust the UK. So in order to build trust with China we have to do the groundwork. It is not something where you can say, "Have trust, we will do something this year and then next year it will pay dividends." With China you have to go in the long term and build the ground trust with the people on the ground-in our case the academics-and then have them speak to their policymakers, because the policymakers in China will trust people on the ground. The same is true in industry. You have to go and do the groundwork first.

Q22 Dr Lee: Finally, is there evidence that you are making progress on this? Is there actually tangible evidence that there has been an innovation or an exchange of knowledge where a British company or a British university has benefited directly from the relationship, or are we still in the stages of just wondering whether they are going to honour the agreement?

Professor Davies: There is evidence. In our own case, British companies are receiving contracts from China as a result of our collaboration-the joint venture that we have formed with Fudan University.

Professor Le Quéré: We publish every year annual carbon emissions for all the countries of the world, and this year for the first time the Chinese ran a press conference with us to release the evidence on global and regional CO2 emissions in China. I think this is a direct result of our collaboration.

Q23 Sir Robert Smith: One of China’s challenges will be the fact that it has great coal reserves, growing shale gas discoveries and a huge and growing demand for electricity, so the carbon emissions that are going to come from that are a major threat. Obviously, they are starting down the road of trying to see if CCS is a solution, and in your submission you make the point that there is a huge opportunity for collaboration. Can you describe how this opportunity could be realised?

Professor Davies: At the Tyndall Centre, we do not do CCS work directly ourselves, but I think it is difficult to believe that there is not an opportunity when China has something like a third of the global active CCS pilot projects and is seeking to build international partnerships. Almost certainly this would have to be around a real demonstration project, and of course there has been funding allocated for a demonstration project here in this country. I think there is also scope for CCS around some biomass-generated electricity, since there are enormous potential sources of agricultural waste in China. Of course, if successful, then one moves into the realms of negative emissions.

Q24 Sir Robert Smith: But in your studies, you do not actually have any concrete suggestions as to what the UK could be doing to encourage these initiatives?

Professor Davies: No, we have not looked at that directly.

Q25 Sir Robert Smith: The other challenge for domestic carbon reduction is that if CCS is going to deliver in the UK, it very much has to work on gas as our primary likely fuel. If we are looking to get into the Chinese market, should we still be looking at coal as well?

Professor Davies: China is planning an enormous investment programme in its shale gas. The current estimate is that it has 50% or 60% more shale gas than the United States reserves, so China will be developing an interest in CCS around gas.

Professor Le Quéré: Nevertheless, it is very difficult to envisage that China will not exploit its huge coal reserve, because it is such a cheap source of energy, so I think CCS with coal will be necessary.

Professor Fankhauser: There is a bigger picture point that should not be lost, which is that the Chinese have a very ambitious target, relative to their growth rate, of bringing down their carbon intensity. I think by 2020 they want to bring down their carbon per unit of GDP by 45% or something like that. If you unpack that number, most of it is based on reducing energy use and energy intensity, rather than the carbon intensity of energy, so there is an untapped potential to decarbonise energy use. The Chinese have mostly focused on energy efficiency; they could go so much further if they also looked at the carbon intensity of their energy. The obvious way to do that, given the discussion we have just had about coal and gas reserves, is CCS. It is something that, from a big picture point of view, you cannot ignore.

Q26 Christopher Pincher: A very quick question about buildings and building regulations. If you wander down to Canary Wharf you will see buildings springing up all over the place, but if you go to China, as we did last month, you see cities springing up all over the place-not just commercial buildings but residential buildings. There was some question raised about the building standards that are applied to those buildings. What is Chinese building regulation like compared with British building regulation requirements?

Professor Davies: They tend to follow the sort of standards, but are some way behind. I think there are issues about compliance in China with the existing building standards within China, particularly outside the big cities. This is one area where there is significant scope for working with the Chinese and this is what we are doing on a number of our projects-persuading some of our collaborators to design and build exemplar energy-efficient, low-carbon buildings. I think that the Government can help promote the use of BREEAM standards within China. They tend to use the lead standards when there is a-

Q27 Christopher Pincher: When you say "Government", do you mean the Chinese Government or the British Government?

Professor Davies: The British Government, yes.

Q28 Christopher Pincher: What are the roadblocks to the enforcement of the standards, which you say follow behind British standards but which are not being enforced? What is the reason for their not being enforced?

Professor Davies: There is still a lack of awareness within China of how one goes about delivering high-efficiency buildings to spec. This will involve in the pre-planning and the design phase everybody involved in the construction-the architects, the designers, the M&E engineers, and so on. This does not happen as a matter of course in China. I think there is also a relative lack of understanding about post-delivery management of energy, even within relatively energy efficient buildings that have been handed over in China.

Q29 Christopher Pincher: If one way of doing that is to build state-of-the-art business parks that show the Chinese what can be done if British architecture, skill and know-how can be brought to bear, do you feel that you get enough support from the British Government to bring those skills to China?

Professor Davies: There could be more support. There is this enormous appetite in China for low-carbon innovation. We make the point in our submission that other countries’ low-carbon experiences tend to be more high profile than those of the UK, but I think the delivery of truly exemplar buildings and truly exemplar developments will help. I have been struck by the fact that there are major low-carbon developments, low-carbon sites and parks, which are joint ventures between China and other countries. The German Government are the most prominent there. The Chinese would welcome a UK-China low-carbon science park.

Chair: Thank you. I’m afraid we have run out of time, but thank you very much for your attendance. There might be some issues that we would like to follow up in writing with you, if we may.

Examination of Witnesses

Witnesses: Nick Mabey, Chief Executive, E3G, and Felix Preston, Research Fellow, Chatham House, gave evidence.

Q30 Chair: Good morning. Thank you very much for coming in. I think you have heard some if not all of the previous exchanges. You have been strong advocates of pursuing greater low-carbon co-operation between Europe and China. Where do you think the most promising areas are for mutually beneficial collaboration?

Nick Mabey: I would say it falls into three main areas. Firstly, keeping our promises and delivering on the large amount of co-operation we have set in train with the Chinese, which we have a track record at UK and EU level of not delivering on-which the Chinese notice. That includes the CCS demonstration plant that has been ongoing since 2005, but there is still no identification of money to build it. Are we going to do it or not? There is also backing the delivery of low-carbon zones, of which the UK started the process in 2007-2008. The Chinese agreed to set up seven cities, five zones, covering 300 million people; I think we are allocating tens of millions to that, which in China does nothing. On the trade and investment side, there is a huge need to manage that relationship strategically, but there are also some areas, particularly around cars and smart grids and, as you have mentioned, buildings, where by setting joint standards and working on co-development, Europe and China-because this is Europe level-could set the standards for a global low-carbon economy, with all the benefits that would bring going forward.

Felix Preston: I agree with all of that. Echoing the previous panel, I think that some of the longer-term technical projects, which have a political dimension too, that establish trust in key areas-whether that is low-carbon zones or, before that, the UK was instrumental in establishing the first piloting area for adaptation in the north-west of China-are successful. Looking forward, the key is to look beyond some of the specific sectoral initiatives or initiatives in key technical areas and look more at the systemic level-how sectors interact and how innovation cuts across key sectors. I see that as the future. I think the UK has been really important, with a number of other countries, in working with China on some of the key nuts and bolts of different bits of the economy, but how the bits link together is now the key.

Q31 Chair: You suggested fast-track, low-carbon technology demonstration opportunities should be identified. Do you have any particular technologies in mind?

Felix Preston: I think the sensible place to start is with the seven strategic emerging sectors China has identified in the 12th five-year plan. As some of the research institutes in China are proposing, those seven should account for about 15% of China’s GDP in 2020-a rapid ramp-up from about 5% or 6% now. Some of those key sectors are sectors that the UK has an interest in too, particularly electric vehicles and biotechnology, but the UK has a particular interest in a range of others, including new and advanced materials science. It would make sense to me, from a low-carbon point of view, a Chinese industrial transition point of view and a view of where the UK’s interests are, to start in those places.

Nick Mabey: I would back that up. When looking at these areas, our experience from working on CCS is that we have not really decided the balance between short-term commercial interests as defined by firms,- and longer-term economic interests as defined by HMG and the UK economy as a whole, in terms of engagement with China and how that relates to broader strategic interests in energy and climate security. That rather muddled set of objectives often gets in the way of the type of bold engagement the Chinese appreciate, and which they get from other partners like the Japanese. China is a complicated country. Their civil servants are incredibly overloaded because they have very few of them. They want to do a few big things and not hundreds of little penny packets. They will be nice and be polite and nod, but they will not take them seriously.

Coming back to our CCS objective, we need to identify the highest levels of priority. Does it look like we have prioritised it in terms of funding and resources? No. Again, we need to deliver in some of these areas we have opened, like CCS, or where we have the skills, rather than launch another 15 initiatives we will not back up with real resources.

Q32 Chair: Specifically on CCS, though, is there now a difficulty, because since 2005 it looks as though the priority in the UK should really be CCS for gas rather than coal? We are going to suddenly burn much more gas and much less coal, so putting money into a coal project may be rather a lower priority for the UK now.

Nick Mabey: When we set that the CCS project up, it was not linked to the UK’s energy issues. The UK was instrumental in getting the European CCS demonstration programme, which has perhaps six to eight projects, which will cover lignite and coal. If we look at that as the source of domestic demonstration essentially across the EU, there is quite a lot to share and engage with the Chinese on. We will see if we can get a gas demonstration in that space. However, the aim of the co-operation with China was really about solving China’s problems. When it was initiated, it was not really about solving the UK’s energy problems, but the Chinese were very sceptical about talking to us about technology we were not deploying at home. That is a very typical engagement with the Chinese-"Are you doing it? Show us you have done it then we will learn the lessons and then adapt it to our local situation."

Q33 Sir Robert Smith: There has clearly been a move in China’s stance in the international negotiations on climate change. How much of that has been because of bilateral engagements by countries like the UK, and how much is China identifying that it is going to be affected by climate change and that because it is a big part of the problem, it has to be part of the solution?

Nick Mabey: As in any country, it is a mix-a mix of motivations and a mix of coalitions inside the Chinese Government, ranging from the economic modernisers to people looking at climate impacts to geopolitical positioning. The area where the UK in particular, operating through the EU and bilaterally, did make a huge impact is pushing the idea of a low-carbon economy. We just took some DRC and Ministry of Science technology officials to Turkey to discuss Turkey’s low-carbon economy issues and how they related to China’s experience. It came across over and over again that a lot of the intellectual framework, the policy framework and the confidence to move forward on a low-carbon economy came from engagement with the UK and other European partners. It would not have spontaneously sprung from China. When we started discussing it with them six years ago they were quite resistant to the agenda, so I think we can say it has been a really important part of a much broader set of conversations in China.

Felix Preston: I want to pick up on one component of that. It is certainly true that there are all kinds of pieces in the puzzle helping that process move forward, but one of the key areas where the influence has taken hold is where the technical work and the ambition-whether it is framed as low-carbon economy or green growth or something else-have been connected in detail to Chinese domestic policy objectives in key strategic areas, for example, moving up the value chain in key industries, or differentiated regional development to boost the western regions. Where the broader ambitions and perhaps global ambitions can be connected down to the language that local officials are measured by and understand, I think that is the bridge that has been the most profitable.

Nick Mabey: The process was very deliberate in the project E3G and Chatham House did with Chinese institutes to look at opportunities for co-operation between Europe and China-trying to find those Chinese drivers and then aligning some proposals for co-operation around those domestic drivers. We spent a year working very hard to find those points of alignment before we launched a cunning plan to co-operate, which I think is why some of the ideas we launched, like low-carbon zones, have had more legs. That shows that knitting together the diplomatic political intelligence piece with the co-operation piece is necessary if you want to succeed in such a big country as China. If you cannot find leverage on domestic politics, your money is just frittered away. Too often, money is programmed at a technical level, without any consideration of those broader concerns, so you do nice projects but they have very little leverage on the Chinese definition of their national interest, which was actually the original aim of some of this work.

Q34 Sir Robert Smith: The key thing is to identify how you fit into their national interest and then sell it back. Is there anything we should be doing differently as a country in terms of motivating China on the international negotiations?

Nick Mabey: I think UK engagement and European engagement as a whole have drifted back in the last few years. Due to changes in government and changes on the ground in China there is far less co-ordination, there is far less clarity of purpose, which perhaps the Copenhagen conference gave, and there is a real need to come back and develop strategies on delivery. The EU has just launched an EU urbanisation project with China at the EU-China summit, but there is no money or staff to deliver it. Around trade and investment, there is a huge bundle of issues that have yet to be sorted out, and no European country has a strategy on how to manage this issue with China. As for the whole issue around impacts and energy and resource security, the Chinese have now opened a door and are willing to talk to Europe about energy security and resource security, and climate change obviously wrapped around that, but again we do not see signs of a joined-up response to engage. We think there is a huge need to join up and then back it with real resources-the UK has reduced its funding in China recently, not increased it. Even though we have created the conditions where it could have massive leverage on Chinese positions, we are reducing funding rather than supporting extra action.

Felix Preston: As well as that political engagement level, I think that plays out on the ground in terms of EU co-ordination in the key areas in which many European countries have interests-energy and environmental issues, obviously-in China. Very often on the ground there is a lack of general awareness, transparency and interaction between all the different Governments in terms of who is investing. Whether it is urbanisation or desertification or whatever, even a simple mapping exercise can be quite challenging. Efforts to make that more transparent, to link it up and ideally to connect it to the strategic objectives, such as the new urbanisation strategy, are very important and could benefit everyone concerned.

Q35 Sir Robert Smith: Has the change you detect happened because the economic climate has changed, or is it something more fundamental in the thinking of the EU?

Nick Mabey: It is partly because you go through periods where you have high co-ordination and then people change and move on-entropy. It is much easier to do things on your own. So it is partly just natural dropping away. Also, the economic crisis means that people have been focused on different issues. I think it is clear from the EU-China summit that there is an opening to go back in and increase the co-operation-for example, the EIB is spending billions in China on low-carbon projects. However, there is no strategic input from any of the shareholders of the EIB to focus that on areas that you think would have the highest impact, such as the low-carbon zones we spent years trying to set up in China. So in some ways what we need to do is very simple: we need to focus our energies on places where they can make a demonstrable difference, because by making a demonstrable difference will persuade the Chinese a low-carbon economy is possible and that is one of the biggest elements we need to shift their political position. It is quite simple political logic but it gets lost in the bureaucracy of allocation, because there is no core UK or European strategy around this issue.

Q36 Christopher Pincher: You said that China is much more open to engagement now as a result of governmental and political negotiating there, and we heard from the previous panel that there are things that the Government can do to help diffuse low-carbon technologies beyond the developers to the wider community and users. What do you think the Government should do next, and what are the roadblocks in the way of further engagement to diffuse those low-carbon innovations through China?

Nick Mabey: Are you talking about the problems in China rather than our engagement?

Christopher Pincher: What stands in the way of the British Government becoming more engaged in helping to diffuse those ideas?

Nick Mabey: The roadblocks in China are very much about the broad systemic issues as they move from a command-and-control model to a more bottom-up, market-driven economy, which is a very difficult thing to do. That creates a lot of opportunities for the UK to give its experience on things like emissions trading-we were doing a workshop just last week in China-and electricity market reform, where we have been discussing with DRC the lessons from the current UK EMR. They are very interested. The real blockage of doing that on the UK side is there are no people and there is no priority. The international climate change division of DECC has been cut by 30% or more. It is not clear what priority they should place on engagement with China, especially on the ground. That is where they have least resource. So again, it virtually needs a UK-China taskforce to pull the resources in Whitehall into something a bit more coherent, rather than a lot of individual engagements, sometimes with an EU partner, sometimes without, that don’t get above the threshold of impact, which I think is where we are at the moment. If there is to be no more resource, which there probably isn’t, the question is how to use the resource we have more effectively, and outside-Government resource, which is very strong.

Q37 Christopher Pincher: What about the fear of loss of IP? Do you think there is a sufficient system of law to ensure that in any joint venture-as long as it may have gone on for and as worthy as it may well appear to us-the IP that is brought to bear by British companies and academics is protected?

Nick Mabey: I think the IP situation has changed a lot in the time we have worked in China. The Chinese system has got better. Foreigners are better at using the Chinese system, which they were often very lax at doing, and there have been more bilateral agreements. There is much more bilateral agreement with China about enforcing IP with European capacity on the ground to help companies do it properly, and essentially give priority redress, because the Chinese know it is a strategic issue. Thirdly, that the Chinese care more about protecting their own IP now than they did. Chatham House has done a lot of work on Chinese IP generation, which the Chinese want to stop Vietnam, Thailand, Brazil and India from stealing. If you do it properly-if you put in the right safeguards, take an appropriately jaded view of your partner and choose your partner properly in China-you can protect your IP. That involves quite a lot of human capacity and knowledge on the ground, and we could probably have more of that. We have worked on how you can get more support for SMEs in particular so they feel comfortable with that. It is doable-not easy, but moving in the right direction.

Q38 Christopher Pincher: How enforceable is it? It is all very well to have a set of laws that courts are meant to enforce, but if the courts don’t enforce them or you are perhaps encouraged not to apply to the court, how easy is it to enforce? Is enforcement patchy? It may well be applicable in Guangdong, for example, but is it as easy to protect your intellectual property in the western provinces?

Nick Mabey: I think the numbers were that 80% of foreign claims were approved by the Chinese court-

Felix Preston: Yes, albeit perhaps the appeals court. I am not an expert in the local situation of the Chinese IP legal system, but certainly it is changing fast and Chinese officials will quite happily discuss where the improvements are being made and where the weaknesses are. The reality is that companies are still investing in China, taking risks and presumably taking benefits. IP is one of a set of issues that companies will be very concerned about, but I don’t think it is necessarily a deal-breaker across the sectors that we were talking about.

Nick Mabey: One very practical thing we have been doing is around a low-carbon industrial zone we have worked with the German Government on in Nanjing. We developed the pilot to look at where the Chinese want to bring European medium-sized enterprises in to work with Chinese state-owned enterprises and large firms in the low-carbon sector. We workied on the idea of a specific IP support centre there, basically to hold people’s hands and go through the process, and a separate agreement with the local government and national government to protect IP. We understand the Japanese have done a similar thing. You can lock in extra safeguards, especially when you are doing large bilateral engagements, as the Germans are doing in Nanjing allied to large German commercial investment, because that is where half of European investment goes. Nanjing are very keen to keep that going and not to be underbid by other places in China with investment incentives. I think you are right to say that we don’t have a map of the local application, but there are certainly places that are working very hard to give reassurance and work more productively on enforcement.

Felix Preston: The temptation is always to focus down on to the latest advanced pieces of kit and technology. Certainly from a UK point of view, we would be just as interested in many services, whether that is the software associated with the smart grid, a lot of the systemic changes, or the accounting required to track environmental performance. The IP issues are quite different in these areas, and I would imagine these are some of the key areas for UK potential growth in China in a low-carbon dimension. The carbon accounting and resource accounting areas are potentially huge, but are often under-talked about.

Nick Mabey: In terms of trade issues, perhaps there is a tension over China wanting to grow its consulting services, investment banking and these types of soft services-an area we are very strong in. There are lots of restrictions, even though Arup and others have strong practices in China, and on a joint trade and investment agenda, services and investment access is probably more important than IP in terms of getting value out of the Chinese low-carbon economy for the UK and Europe. You can manage IP contractually a lot more tightly than you can some of those opening issues. Trade is pretty open, but investment and services could be opened up far more.

Q39 Albert Owen: Concentrating on the UK Government’s existing low-carbon programmes with China, what is your assessment and how could they be improved?

Felix Preston: With Nick’s caveat that in some areas backing up promises would be important, and taking a longer view, I think the UK had a very positive impact If anything, there is perhaps a lack of institutional or departmental memory about some of the positive impacts of the co-operation that has taken place. I don’t know how far back it goes, but I certainly know that one project I worked on, which started in 2001, developed probably the first comprehensive climate modelling exercise with Chinese agencies. In a suite of areas, whether that is energy standards and labelling, climate change adaptation, low-carbon zones and so on, I think there is quite a good story to tell. I think UK Departments are less well co-ordinated elsewhere than they are in China-it can be quite good, although of course it can always be better-but in some parts of the world we have benefited from funding from the Foreign Office, such as though the Prosperity Fund, which you mentioned. In some of these key areas we also work with DFID and sometimes, of course, with DECC as well.

My concern is not really the way that the UK interacts with itself, but whether it is in a position to look at some of the more transformative, ambitious systemic changes in China. It was fine and the right thing to do five years ago to focus energy on, say, the way to measure the carbon emissions of a product. Such things are still important, but increasingly, looking at some of the broader issues-price reform, for example, which is a really key issue moving forward-China has a big circular economy agenda which to my knowledge is about cleaner industrial systems and cleaner production and consumption. That is a big area where the UK could make a big impact. The natural tendency is to invest in shorter-term projects with measurable carbon emissions benefits over a short time horizon, and while that can be laudable, we should keep in mind the perhaps slightly riskier but more ambitious projects that have the potential to deliver big changes and match Nick’s criteria-he emphasised the importance of getting the attention of Chinese officials on the big ideas and connecting with those, not just doing bits and pieces. If that can be addressed and the focus maintained, then it is not-

Q40 Albert Owen: Would you agree that is a fair assessment, and could you add what you think could be improved?

Nick Mabey: I think that if you take the last 10 years, the UK has been probably the best engager with China at a strategic level on this issue and has set frames with certain producers. It does lack the capacity on the ground.

Q41 Albert Owen: What evidence do you have to say that?

Nick Mabey: We work with the US. When the Obama Administration came in, they took the work we and Chatham House and China’s Academy of Social Science did on interdependencies and used it to write the briefing for the Obama Administration that shaped the first US-China summit, and we know a lot about-

Q42 Albert Owen: What about its near neighbours though?

Nick Mabey: The slight enigma is the co-operation with Japan; that is very hard to find out about. My inkling is that there is an EU-Japan-China triangle, particularly after Fukushima, around clean energy markets and technology, which could be a very powerful driver. On Japanese co-operation it has proved to be very difficult to find out as much detail as we would like-as much we know about Australia, the US, France and Germany-so that is an area we are currently thinking of trying to dig into.

As I say, the weakness of the UK is on the ground and in financial investment terms. We do not have the type of network the French and the Germans or even, to be honest, the Dutch have on the ground in terms of delivery, and that is a weakness when China is starting implementation. We have been better in the past on trade, especially when Peter Mandelson was trade commissioner. He used to carry high-level messages on low-carbon trade into the economic fora. That has fallen back because of a lack of engagement.

In the areas I would highlight-the nexus of energy security, resource security and climate security-we have a lot of engaged interest. The UK is in a prime position to lead that dialogue because we are kind of the leading thinker P5 country on that issue and, as I said, China has started to open up to it. It would not have talked about it a few years ago, but now it might. The systemic issues on policy, electricity market reform, low-carbon finance issues, emissions trading systems-that is an open door to engage on. DECC does not have the capacity to do that at the moment.

Q43 Albert Owen: You say DECC doesn’t have the capacity to do that, so my next question is: are the Departments working together? Do you think the collaboration between the Departments is sufficient, or are they working in silos?

Nick Mabey: Half-al dente.

Albert Owen: Half a silo?

Nick Mabey: Yes, half. There is quite good co-operation between DECC and the Foreign Office and it has been building up; less so with UKTI and BIS-we used to have strange things happening on the trade promotion side. But is there a proper UK strategy, driven at Cabinet level with clear objectives? No. Do we need one to get best value and impact? Yes.

Albert Owen: Okay, that is a good answer.

Felix Preston: Yes, and I totally agree with that. It is not perfect, but I think if that strategy was in place, because the institutional architecture is a lot better in China, UK-wise, than it is in other parts of the world, it would not be impossible to deliver real change on the ground. I think Nick is right; perhaps all countries are better at different bits of the picture, and the UK is better at the policy and strategic end than it is on, say, the real project engineering side on the ground. It might be a question of reprioritisation, but it is just as much a question of reconnecting with the other European and other international partners in China, because they can bring this bit.

Q44 Albert Owen: That is my question, but before I move on, do you think it is BIS that is the weak link? Do you think that DECC and the Foreign Office have a good working relationship and that BIS is-

Nick Mabey: BIS is the weakest partner in the conversation.

Q45 Albert Owen: Okay, fine. Then just specifically-you have touched on it, both of you-what can we learn from other countries? Are there any specific programmes that the UK could say, "Yes, we could do that, but do it better."?

Felix Preston: Not that we can necessarily track it, but as Nick has mentioned, some of the Japanese engagement is having real impact, or at least having real influence. The Top Runner Standards programme, which is a major energy efficiency programme in Japan, is being looked at very seriously in China and would have a very big impact. There are clearly areas where other countries are doing important things-France is very active in urbanisation of buildings, for example. Whether it is a case of copying that, though, is doubtful. Probably we should be allowing or building on that in different ways rather than trying to replicate it.

Q46 Albert Owen: Learning from it rather than copying it?

Felix Preston: Yes. The difficulty is often that you have a multiplication effect, where one country finds a good way to engage and then five other countries do something similar in a different way. That can be beneficial, but obviously it can be quite wasteful too. One thing that I-Chatham House-have been heavily involved in is something called the China Council for International Co-operation on Environment and Development. This is a Chinese organisation, which had its 20th anniversary in November. It brings together senior Chinese experts and officials with international experts and officials from a whole range of countries. The UK has been involved in that, but it has had a lower profile than, for example, some of the Scandinavian countries, Canada and Australia. My experience of that is that it is a very rewarding and engaging process and I would strongly recommend the UK Government Departments to engage more in it.

Q47 Albert Owen: Mr Mabey, anything to add?

Nick Mabey: Our advice has always been you need to align the major European countries. They have much more capacity than the Commission, for example-although the Commission has a lot of convening capacity-to make the most of this. In late 2007-2008, the UK used to host a "friends of low carbon zones" group, of about eight European countries. It was a low-carbon zones group, which looked at both diplomatic engagement on the low-carbon economy and also practical co-operation. That has fallen away, partly because of commercial pressures-the French sometimes like to keep French things to themselves, whereas the Germans are more open to co-operating. But all the people doing implementation on the ground find co-operation a bit irritating, and they need a push from the top to say, "Let’s take the Wuhan model of building retrofit that the French are developing and have been working on for several years, and put it in other areas." The question is how we make the most of our small but potentially high leverage inputs in China. A push to force the downstream bit of Europe to work together better to get best value would give us all more commercial and other opportunities. There is a bit of a short-term beggar thy neighbour that is killing off a larger, more strategic opportunity.

Q48 Albert Owen: Thank you. A final question to Mr Preston. From your previous work, what do you think are the pros and cons of this type of co-operation between the NGOs? We know you have worked in, what was it, CCICED?

Felix Preston: Chatham House is not a classic NGO; it is an independent research institute. I can’t speak on behalf of the likes of Oxfam and Greenpeace-the classic NGOs. In general, I think NGOs bring an important part of the puzzle.

Albert Owen: I am not asking you to speak on behalf of NGOs, but just to give us your opinion.

Felix Preston: I am not sure quite what the question is.

Q49 Albert Owen: What are the pros and cons of the type of work that you are involved in for NGOs? Are NGOs a good vehicle for collaboration in the future?

Felix Preston: They are a very important piece of the ecosystem, if you like, of trying to create policy change. Of course they can be more on the front foot, more of an advocacy type of body.

Q50 Albert Owen: I will be clearer. We have governments, we have institutions such as those represented by our first panel of witnesses, and we have NGOs. Are some being crowded out? That is the gist of my question.

Felix Preston: I think it is a complicated question in the China context, because we have international NGOs there, we have NGOs that are more Chinese national NGOs, and then a lot of the international NGOs are halfway houses, so I don’t think I can give you a clear answer on that.

Albert Owen: Okay.

Nick Mabey: There is a big difference between types of NGO. There are advocacy-based NGOs that are trying to build a civil society in China and help Chinese civil society, which is an incredibly important task from the bottom up. Foreign money in support is a very mixed blessing in that circumstance because of their sensitivity, as you found out when you visited China. But China is very open to ideas, much more so than India in terms of foreign ideas, and the impact of more people with policy experience. Having previously been a Government person going to China, you get a much better conversation going in as a non-Government person-you know what that is like. You can get into the world of ideas that is a kind of substitute for politics in China in many ways, and that is a very powerful piece. I don’t think we are leveraging our intellectual resource as much as we could. That makes a huge difference in China-it can change policy debates in ways that are very hard to do in democracies, many of which are much less open to ideas than China is.

Q51 Ian Lavery: In terms of policy development, looking at the policy development between the UK and China, I think it is generally said-some of the submissions suggest it anyway-that in terms of development and implementing low-carbon and climate change policy, the UK has considerable expertise. I am sure you would agree with that, but development is completely different, as are policy and implementation. In which policy area do you think that there is greater scope for sharing the methodologies and best practice with China?

Nick Mabey: The Chinese respect UK policymaking. They see that our implementation record is not as good as other people’s-they were very clear about that in my discussions last week with senior officials. They particularly look to the UK on issues like liberalisation, energy system reform-electricity market reform is key for them-and the emissions trading system. They have taken some of the work on low-carbon road maps-I am not sure how much. I don’t think they think our energy efficiency policy is anything near world-class-they will probably take that from Sweden. So they are very pragmatic and have quite ruthless judgments on what we are good at and what we are not good at, but particularly electricity market reform and liberalisation, ETS, are seen as kind of UK strengths, as opposed to perhaps some of the other more industrial policy areas, where they would look to the Germans or the Swedes.

Felix Preston: I agree with all of that. Greenhouse gas and energy calculations, tracking, monitoring and modelling, as well as climate modelling, are the technical areas where Chinese officials and experts tend to be very interested. Another component of this is that they are interested in how the UK sets and allocates its targets across Departments or across parts of the economy, so even though they may be sceptical about our ability to deliver in some key areas, they are very interested in how targets from a broader sort of Climate Change Act down are broken out into different departmental responsibilities and so on. I think that when they talk about that area of UK policymaking, that is what they are really asking.

Q52 Ian Lavery: There are different ways and different means of sharing the policy expertise. We were in China two or three weeks ago, and there are learning visits, UK delegations to China, Chinese delegations to the UK and the provision of written guidance. What do you think is the best way of communicating? What is more effective in terms of guiding the Chinese in policy development?

Nick Mabey: It is different at different levels. At the top level, my experience is the Chinese like to hear from the people who ran a policy. When I was in the Prime Minister’s Strategy Unit, we used to talk to the Communist Party Strategy School as well as the DRC, and they just wanted to talk about, "How do we get departments to join up? How do you get coherent policy?" It was all about the real frontline mechanics of getting things done and talking to someone who has had the experience of driving through a policy. That is about sending your policy leads to China in small groups, well-articulated with key decision-makers. They will drain them dry of that practical, pragmatic information.

At the local level, because they have lower capacity and they are not as cutting edge as the central Government, it is much more a matter of education and supporting demonstration and co-design. That means taking your experts in and designing an emissions trading system with the local government, adapting it to the local circumstance or designing a low-carbon zone with them-it is the kind of co-design work which requires parties to engage for a longer period of time, not just visits-and then taking it through the implementation obstacles, which takes a lot of work. In China, if you can show it works, it is worth 1,000 times more than a million policy papers. They have enough paper in their own system; they want to see things work, so you have to invest enough to get it across the line, not just say you had a nice visit. Felix, you worked in Jilin, you may have a view.

Felix Preston: Oh, wow, yes. Nick is alluding to some of the detailed technical work where we have engaged in Jilin in the north-east and also in Chongqing in the west. Chongqing is one of the low-carbon pilots and also an emissions trading pilot area. Coming back to my earlier experience, I think you need to build relationships with agencies at multiple levels. The work we did in Jilin could not have been done without direct engagement with the best people in Beijing and the most relevant experts, but it also required the technical experts in the local area, as well as the political backing, or at least the evolution of political backing, in that area over time. Those things can come together and you end up with some level of policy change, one hopes. I have seen that happen a couple of times in China. Once you get the policy change, you can have very rapid change on the ground, but it is about demonstration and, as I mentioned before, connecting it to what China really cares about, not what the UK really cares about.

Nick Mabey: In practical terms, that means a scattergun approach, purely driven by who puts applications to the embassy in Beijing, is not a good way of allocating resources, because you are not sure you are going to get enough focus on the thing to have even a chance of getting above the bar of success. You may get lots of nice little pieces and it doesn’t mean you don’t open up the doors for innovative ideas, but it does mean you choose a few and back them with your political and your diplomatic and your financial resources, rather than just come back with lots of nice projects. That for me is a complete waste of taxpayers’ money and a complete waste of time, because it has no chance of success, no matter how good the people you back are. You are condemning them to failure at the beginning, and that is a lesson we have learnt the hard way through many years working in China.

Felix Preston: Just one very small almost technical point, a lot of projects I have seen fall over did so because they didn’t bring in the different organisations on the Chinese side. It is important to engage multiple departments at once; otherwise you fall into the trap that all governments suffer from. You can push silo-isation on the Chinese side, if you like. From the very early stage, in the political engagement before a big project happens, it is important to bring in multiple departments, all the relevant departments to the greatest extent possible, because that ensures that there will be an interest in seeing the political delivery in those different departments at the end of the project.

Chair: Good. I am afraid we have another panel, so we have to move on. Thank you very much indeed for coming in. It has been very helpful for us.

Examination of Witnesses

Witnesses: Baroness Bryony Worthington, Sandbag, George Yu, Sandbag, and Richard Baron, International Energy Agency, gave evidence.

Q53 Chair: Good morning, and welcome to the Committee, particularly those of you who have not given evidence to us before. We appreciate your coming, but our time is limited, so I won’t delay with long introductions.

We want to talk about emissions trading. Do you think that if China develops an emissions trading system, it would encourage other major emitting countries-notably the USA, of course-to develop their own system?

Richard Baron: I think there is already a trend in the USA at the local level, first of all, to develop emissions trading systems in a way that would be consistent with an international mechanism; they are also seeking to conduct projects, including in China, to create offsets there, so the pressure already exists in the US. Certainly if there is a price of carbon in China, part of the opposition in the US on competitiveness grounds will fall apart, which might facilitate decisions on that score there.

Baroness Worthington: I second that. I would add that if China is serious about developing emissions trading, it will have a very great effect on its immediate neighbours, which probably will happen ahead of the US nationally moving-I am thinking about Japan, Korea and Australia in particular. If those countries all came together to create a sort of regional trading scheme, that would be hugely significant for the region.

George Yu: Yes, and look at how the Chinese have been doing domestically, especially on this new five-year plan, which has been described as the greenest five-year plan. It is trying to move from quantitative growth to a qualitative growth. Also, four of its seven strategic emerging industries are related to environmental protection. The Chinese have putting in a lot of effort to improve their environmental record. I would say that China’s domestic actions are coherent with what it has been stating internationally, especially its target of a 40% to 45% reduction in carbon intensity from the 2005 level.

Q54 Chair: Recognising there is some sort of bottom-up trend in the US, it is difficult to see at the federal level a great deal of movement on that. It looks to us as though perhaps the biggest influence China would have is in the region, rather than more widely. Do you think it is practical to look ahead to a time when there is going to be international linking of different emissions trading systems?

Richard Baron: I think there is a clear possibility there. First of all, one question is whether China and its system will allow offsets from the international system to come into its regime. If the Clean Development Mechanism, which was agreed for continuation in Durban, indeed delivers tonnes that will be used in China, there would be a de facto linking between systems elsewhere that also rely on CDM. Secondly, provided that China has a robust system-one where all others recognise that a tonne is a tonne-the likelihood of linking certainly increases from where it is now, but this will have to go through a number of hurdles in China and it will be quite some time before we get there. I don’t think it is a next-year issue. It might be for the next five years.

Baroness Worthington: I agree. The focus will be on getting a domestic system up and running for its own internal purposes, and I suspect the Chinese will be hesitant to link in the near future, just as the EU has been. I think it is all a question of getting our own schemes up and running and functioning before we consider how you would link them and the effects of linking them, which might not always be positive.

George Yu: Emission trading is in it’s very early stages in China. So far it is very unclear how the pilot project is going to run-probably in the next five years-so there are likely to be a few points that people have to bear in mind when they start to trial and error all these projects. Low-carbon development-and emissions trading especially is a relatively new concept in China, and people, especially those participants, are not really sure what this concept will be, so it might be very helpful to have sort of a universally accepted concept.

Q55 Chair: Does it look as though the way that the Chinese systems are being designed takes account of the experience elsewhere, particularly in the EU?

Richard Baron: Yes, in full. I believe that a recent decision that was taken by NDRC to indicate to the provinces that they should use hard caps for the allocation to their industry in various sectors is a clear indication that they have looked at what the EU in particular has been doing, and have drawn some lessons on that when it comes to the difficulty of measuring industrial output and also the certainty that a cap-and-trade system brings. That is one piece of evidence. Other evidence is the number of meetings and workshops and exchanges between Chinese experts and EU experts in general, including the UK, on questions related to MRV and so on, where there has been an intense discussion and willingness to learn. However, I don’t think that they are in a position to apply it exactly as we have done. We are engaged with the power generation sector in particular, and because they are not operating a deregulated power generation sector-these are largely state-owned enterprises and a lot of planning goes into power generation-they cannot strictly apply what we have seen in the EU to that sector.

Baroness Worthington: Yes, I agree with what Richard has just said. I suspect that we taught them a lot-by accident-about how not to run emissions trading schemes. It certainly won’t be for want of trying. We have engaged and put forward the lessons learnt from the EU and I think that has been well received. I have had informal correspondence with Chinese officials who have said, "Well, there is no point in doing it unless we are ambitious with it, because we don’t want to be bedevilled with the same problems as the EU has had." I think they are in a much stronger position to make a functioning market work in some senses, because their growth is sustained and isn’t going to experience the sort of wild fluctuations that we have over the last few years. I think they are looking at what has happened here and applying it to their own circumstances, and I am quite hopeful that they will come forward with something that shows they have learned the lessons that we need to learn.

George Yu: A particular example is one of the pilot projects in Guangdong province, where there has been a lot of co-operation with the British Government, who have provided funding through the China Prosperity SPF programme. A lot of funds have been provided to local academic institutes for undertaking a lot of pilot studies. I think the Guangdong province is particularly interested in the EU scheme.

Q56 Chair: Is the Partnership for Market Readiness an effective way of building capacity for emissions trading in China?

Richard Baron: I am one of the experts of the PMR, so I can testify first-hand. It is at the beginning, of course-it has been operational for less than a year. I believe that the exchange there and looking at how it has been done is fairly technical and we see a lot of engagement from countries really far from the negotiation stance that you would see in the UNFCCC, for instance. Countries around the table are really eager to learn how specific implementation details were solved by the countries that have implemented ETS and how it could apply to their own situation, so it is effective in that sense. Also through the collaboration that is South-South, if you will, you have countries with similar problems trying to solve them at the same time. When it comes to thinking about linking in the future, it is very promising to see all these countries working together at the technical level and exchanging views towards that goal. Having said that, there are countries in the PMR that are considering project or sector-based crediting mechanisms and others that are considering emissions trading systems. China is one of those.

Q57 Sir Robert Smith: Previous witnesses have talked about the speed with which China can go from a demonstration to a full implementation in other areas. They were embarking on these pilot projects. How quickly do you see them being able to take the lessons from the pilots to roll out a China-wide system?

Baroness Worthington: They are aware that they can only go as fast as they can go, but there is a definite desire to move as quickly as possible. They have already talked about the fact that not all of the pilot projects will be successful in transferring to a national scheme. The pilot projects are there to inform their learning and to get people prepared for a market, but in parallel, they are going to have to choose probably one particular design and work that up for a national scheme. That in itself is a slightly separate task to running the pilot projects. I don’t think it will be that the pilot projects have to come to an end and then they will consider a national scheme. I think the pilot projects will continue and they will be learning by doing, and there is already process to develop a national scheme in parallel.

Richard Baron: I think very much that they could be developing those two in parallel and learning the lessons, in particular when it comes to data gathering and building the system from the bottom up-virtually from scratch, one should admit-at the provincial level, and seeing what sort of system they could envision nationally to be able to expand. One different route they might take, for instance, is to try to apply a system to their state-owned enterprises-the fairly large emitters, which they monitor well-because they might find out that at a provincial level the work has shown that you have way too many entities and that the monitoring and reporting and verification at that level is much too onerous. So there might be a way for them to develop a system and expand it thereafter, but starting from state-owned enterprises that they know fairly well, that they control fairly well and for which they have very accurate data.

Q58 Sir Robert Smith: We are going to come to monitoring in a minute, but what are the main institutional building blocks that China needs to develop to have a fully developed trading system in place?

Richard Baron: There is a range of those. Looking at the power generation sector, which I know best, one area is clearly verification. There is a long and very rich stream of data produced by the power generators and sent to various institutions at official level-the provincial statistical bureaus as well as the China Electricity Council. The data is coming. The verification, however, is maybe not done at a level that would make EU ETS operators comfortable. I think that is one important element.

Secondly, although they have enforcement mechanisms and penalties and the like, there ought to be some clear thinking through that and how that is going to be done. I have heard, but I am not 100% sure, that there are issues relating to the trading aspect-how entities might trade emission rights and how to build that. There is no precedent for that in China. I am not sure that the Security Commission has been engaged in this discussion yet, so that has also to be built.

Q59 Sir Robert Smith: Is there more the UK could be doing to create co-operation that would help build the institutions and the trading structures?

Richard Baron: Yes, I am sure that on the last score-the issue of how financially to address this and how the accounting system might be adapted to allow for trading-there are issues that sound technical but are critical for the development of the system. Surely some experience that has developed in the UK and in the EU could be useful there.

George Yu: There is a very recent report by the Development Research Centre of the State Council. The report basically identified five areas that have to be resolved before the ETS can be run. They are the allowances allocation, the trading regulations and rules, the market behaviour, the responsibility of different parties and the legal infrastructures for carbon trading. These are the issues that have already been identified by the Chinese, so they will be the areas for the UK in terms of co-operation.

Baroness Worthington: Of those, the ones where the UK in particular has something to offer are on the regulatory side and on the legal side. If there were a third, it is probably the IT infrastructure-how you create secure financial software packages that are compatible across different states and different provinces and how you make those robust so that they are impervious to fraud and other activities. I think we have a lot to offer there. If we could duplicate the Environment Agency and send it to China that would be an enormously helpful thing to do. Those are our areas where I think we have expertise. I am less concerned about the development of trading desks and brokerage facilities and the financial instruments. I think they will come naturally as the market starts to develop.

Q60 Dr Whitehead: We have touched on the question of monitoring, reporting and verification. If China did enter into a national trading system, all the signs suggest that this would not be very robust in terms of the differentiation in agencies monitoring the top-down reporting through provinces, and the reluctance at the moment of China to admit any sort of international verification arrangements. Do you have any thoughts on that, or do you think the opportunities and the groundwork may be there to bring all those factors into line?

Richard Baron: I think we have clearly to distinguish what is known as the MRV issue in the international negotiations from the issue of the data that would be needed to support an emissions trading system in China for its domestic purposes. Of course, when it comes to discussing linking with such a system the robustness of that and how it is being done will be critical. It will be the roadblock if that is not the case. However, I think China has the capacity to collect the data and is very often already collecting it. Regarding the speed at which they can do that, the issue will be where they draw the line about which entities they decide to include in their system and which ones will be excluded. There might be some questions as to whether some leakage might appear to take place if that is done without full care. Transparency-how China reports to the rest of the world on its action-is one question; MRV, when it comes to domestic emissions trading, is another, and I think there it is a question largely, in my view, of verification.

Baroness Worthington: I suspect before emissions trading was introduced in Europe, you could have looked across Europe and said, "Hang on, there might be some problems here with regard to varying levels of robustness, of verification and monitoring," and yet we have overcome them, I hope. That is not to say we should be complacent, and international vigilance on emissions trading has yet to become the focus that it should be, especially when we start to think about linking. There is going to have to be a set of common standards and almost a carbon inspectorate or police force that can help us to give the robustness to all these schemes once they start linking. I don’t really detect China would be against that-in fact, at a national level, they may find it useful to have another body that they are able to turn to to help police the system as it is implemented domestically. I don’t detect anything unique to the Chinese opposing this kind of regulation, because it will be necessary. If we are to get the benefits of linking, we have to subject ourselves to greater scrutiny at an international level, and I think they understand that.

Q61 Dr Whitehead: As far as verification is concerned, one of the issues that was brought to our attention in China is that yes, there is a great deal of information available-increasing amounts of data are available-in China, but essentially it is fed in from provinces, collated by central government and therefore checked by other agencies only very rarely. I think this is precisely Bryony’s point on the extent to which you may almost see this as a precursor of some of the European issues in terms of differences in reporting standards. It may well be that there are very difficult differences in data production and verification between provinces and no immediate instruments to put that right. Is that your understanding, or do you think maybe a rather more optimistic view might be taken?

Richard Baron: I think there are international standards that can be used for verification procedures in particular which, if the Chinese companies were to apply them, would give reasonable confidence to the rest of the world as to the quality of their data.

Baroness Worthington: It is sort of chicken-and-egg, isn’t it? Obviously without high levels of confidence that a tonne is a tonne, a market will find it hard to take off; equally, though, once you create a market, suddenly you have a whole new set of players who are interested in the fact that that tonne is a tonne. If you get a market up and running, the pressure increases on governments to standardise and make sure that what they are trading is genuine. That is the theory, and I think there is definitely truth to that. If you start to apply a financial value to something, the desire to make sure it is what it is becomes greater. Introducing emissions trading will help China to become more standardised in its verifications.

George Yu: Yes, I agree. There is probably not much awareness in the Chinese companies about regularly taking and recording data about their emissions. Also, there is probably not too much international pressure on them to submit all this data, so basically I think they are just told by the national agencies to submit the data and that is it-there are no following steps.

Q62 Dr Whitehead: I mentioned the problem they had-well, not the problem, but the methods adopted in the 11th plan to reach intensity reduction targets. Closing down plant and what have you in order to reach the targets which suggested a rather odd, shall we say, understanding of how that might be done under the existing arrangements. The 12th plan is looking at a transition from quantity to quality. Are you confident that that is going to work? Are there other things that need to be done to make that happen?

George Yu: To make the transition from quantitative growth to qualitative growth, a lot of things that have to be changed. The existing economic growth model that they have had in China to boost its economy for the last 30 years has to be changed as well. The people at the top have already recognised those facts, and that is why in the five-year plan there are a lot of new changes. I am sure there will be many new standards and new, more stringent rules coming out in the future, but it might take some time.

Richard Baron: I was wondering, looking at the decision to introduce emissions trading in the 12th five-year plan, whether that was not coming from some of the very difficult steps that some provinces had to take to achieve the energy efficiency target. In other words: is emissions trading a way to provide some flexibility in the system where there was none when it came to achieving goals? The transition from a system where you have CO2 intensity targets at the provincial level now to a system where those provinces might trade CO2, and tracking compliance with those domestic engagements, is complicated, but there is apparently an appetite for putting some flexibility where there was none before and seeing whether that will bring cost efficiency as well as less hardship in achieving the goals.

Q63 Ian Lavery: The design of the ETS is critical-I think you said that, Mr Baron. There is a number of different types of trading schemes. There is the absolute cap, which we use here in the UK and throughout the EU, and there is a relative cap, often known as a soft cap. Is an absolute cap on Chinese emissions feasible, or indeed necessary?

Richard Baron: I think it is necessary and I think it is feasible. The reason why people have introduced or thought about soft caps-those that grow with the economy, if you will-is to manage the uncertainty that one has about future economic growth. In the case of China, the most pressing issue when introducing the ETS is how they will treat new entrants, but you might very well conceive of a system where new entrants-a new company that opens a new site, a new source-is given a hard cap and yet there is some flexibility as to the number of new entrants you would allow to come in in the future, and you deal with the uncertainty that way.

Another issue that is less political but very important when it comes to implementation of those so-called soft caps or intensity caps, is that you need not one set of numbers but two to implement it. You need the emissions data, which is not so strategic for most industry that records energy consumption, but then you also need the denominator of it, which might be tonnes of cement or tonnes of steel, and that part is more difficult to get. It is also a concern for the competition among firms. There has been an attempt recently by the World Steel Association to conduct a sectoral approach for steel that was largely about collecting data on performance related to CO2. In spite of the fact that the World Steel Association is now chaired by a Chinese industry leader, that proposal fell through on the grounds of competitiveness, because data would be collected that might be used by competitors. That element is also important, because there will be a question related to the reliability of the industrial output data that you are collecting, but also to the hurdles that this creates on the competitiveness side.

Baroness Worthington: I would agree with all of that. I think an absolute cap is necessary and definitely feasible. It is the simplest to introduce, requires the least amount of data, and creates a market where at least one thing is certain and that is the supply of the allowances. Within that, though, there is a myriad of design elements that you can introduce to provide flexibility. We use some of them-we have offsetting limits and the like. California has introduced in its legislation another sort of hybrid soft element to the cap, which is to put aside a strategic reserve of allowances and allow those back into the market under certain conditions. It is not an either/or; you can get many of the elements that you want from a flexible cap within an absolute cap if you design it correctly. I hope those are the sorts of discussions that the Chinese are now getting into in considering exactly how they design their scheme. All the signs are they will go for an absolute cap, though, because they understand that is the simplest.

George Yu: I think an absolute cap, in terms of practicality, is probably too early for the Chinese to think about. The 12th five-year plan is the first time they have introduced carbon intensity targets, so they might not have too many experiences of collecting all the data and all the relevant measures and practices. It might come, but will probably have to wait until the next five-year plan, I think.

Baroness Worthington: Even that is quite quick.

Q64 Ian Lavery: What kind of a soft cap is possible to create a carbon price and limit emissions and at the same time allow for growth in the economy?

Baroness Worthington: There is an ex-post adjustment model where you create a cap but within that you allow for the redistribution of allowances according to the production that occurred in the period. You do not allow the cap to be breached but you allow adjustments so that where production is down allowances are handed back, and where production increases you receive more allowances. It is something that the industry in Europe has been proposing but, as Richard has pointed out, it relies absolutely on having accurate data for production levels; otherwise you can’t do the adjustment. That is filled with problems-there is no standard collection of this data and there are competitiveness concerns about releasing the data-so the simplest is to go for an absolute cap, but you can use the strategic allowance reserves to provide some flexibility for policymakers to adjust in the event of very high prices or very low prices.

Richard Baron: If I may come back to the previous question, I think we need to distinguish the intensity targets that have been established for the provinces from the pilot markets that are being built there, which are not going to encompass, in most likelihood, all of the sources in the region. I believe that, as I indicated before, if there is a proper allowance for the new entrants reserve, they might manage to meet both their intensity target and have a system with a hard cap operating under the provinces. It is a different issue from saying, "When is China ready to take a hard cap as a country?" but I still believe you can operate a hard cap system even inside a country that has taken intensity targets, and implementation-wise I also think it is simpler.

Q65 Ian Lavery: When we were in China, we heard that the inclusion of the energy sector in the potential Chinese ETS would not be feasible because the NDRC sets the price of electricity. Would you agree with that?

Richard Baron: Well, it depends on how rigid the pricing of electricity is going to be in the future. In the work we are doing in collaboration with the NDRC Energy Research Institute, we have looked very closely at this issue. Our first message to the Chinese is going to be that if you want to cap CO2 emissions from power generation, even if it is a growth cap, you will have to incur a cost; and if that cost is not somewhat reflected in the price you will face the situation you faced just recently, where coal plant operators are stopping operations and essentially entering into negotiation with the Government, setting blackouts against an increase in electricity prices, and winning. We would like a system where the CO2 price and the CO2 cost could be limited by a fair amount of the allowances being given for free to the power generators, but maybe a system where the electricity price would increase or be adjusted annually to reflect the actual CO2 cost on average to the coal plants. I believe that if you do not pass any of the cost through, the coal generators are going to have considerable troubles with the implementation of the scheme. We heard first-hand from the NDRC Department of Climate Change that this is a scenario under which the local provinces would reject the systems out of hand. Therefore, they want to engage the pricing department of the NDRC on this issue very soon, and we are providing information to that goal.

Baroness Worthington: It is absolutely possible to have a price-controlled market and an emissions trading scheme as long as, as Richard said, you take into account the fact that there will be a cost internalised that is not already there, so prices are going to go up. But rather than necessarily going down the free allocation route, an alternative approach is to use auctioning and then to use the revenues from the auction to ensure that, if you are worried about the unit cost of electricity going up, people are using less electricity as a result of you helping them to invest in efficiency. So you get over the political barrier of the prices rising by making sure that people understand that, while the unit cost is going up, their overall use of electricity can still go down if they increase their efficiency. That is another way, through the design of the emissions trading scheme, of making the two completely compatible.

Q66 Ian Lavery: Do you expect the emission allowances to be auctioned or do you think they will be given away?

Baroness Worthington: Well, I don’t think anyone knows at this stage. I think they will try to auction some, as we did, because it is a very good way of learning by doing and seeing whether this can be used in the future as the primary way of allocation, because it is the simplest.

Richard Baron: I think the trouble with auctioning from a political economy perspective in China is you raise all of a sudden the question of who is going to take that money and to do what with it, which might not simplify implementation. I think, for reasons related in particular to the recent troubles they had with the electricity prices, if the system were applied to electricity, we would argue more in favour of a free allowance to start with. Then, looking at the experience in the EU and elsewhere, once the price of CO2 goes up, there will probably be a natural transition towards auctioning, provided there is a good sense of how the money is going to be used. We are talking about a system that currently emits in power generation 3 billion tonnes annually and is growing rapidly from there. When you do the numbers with a price of €10 per tonne of CO2, it starts adding up quite a bit, and there might be an issue as to what to do with this.

Baroness Worthington: In a sense, China is in a lucky situation because it doesn’t need the auction revenues as much as we did. It can afford to do the decarbonisation investment and allow for its allowances to be handed out for free if it chooses to. It is just a question of whether that complicates the allocation methodologies, because you then need either benchmarks or grandfathering.

Ian Lavery: Do you agree with that, Mr Yu?

George Yu: I think they could try to have a sort of auction; the problem is the price. They will have to determine that. That is a very important issue. It is very difficult to say at the moment and it depends on how the officials would like the ETS to serve their purposes in terms of going low carbon.

Q67 Sir Robert Smith: Would those be provincial auctions or would they be a China-wide auction?

George Yu: I do not know.

Baroness Worthington: I don’t think anyone knows.

Sir Robert Smith: In terms of recycling the money, obviously.

George Yu: I don’t know either.

Baroness Worthington: Well, they could do what we have done in Europe and use it to help, because they have in their 12th five-year plan an aim of redistribution of wealth throughout the country. They are aware that the growing disparities in the regions are not healthy for stability. I am sure they have picked up from all the literature that is available that you can use allocation methodologies to help alleviate those regional disparities, as we have done in Europe. Hubei and Guangdong are not too different from Germany and the UK and Eastern Europe in terms of their position in development. We have used our allocation to help smooth those differences and China could do exactly the same thing if it chooses to.

Richard Baron: It would be very interesting to see how the provinces handle this, because if they start with a system in which they raise revenues from the system, moving to a national system that would take that away from them might be an issue.

Q68 Chair: Just very briefly in conclusion, why do you think aviation emissions are so contentious an issue?

Richard Baron: I do not work on aviation.

Baroness Worthington: It is because it transgresses the principle of common but differentiated responsibility. Here is the EU acting unilaterally to impose a common burden on everybody outside of the EU. It upsets them on many levels. They are making an awful lot of noise about it and we should not dismiss it, it is a serious issue, but I think there is a recognition at the very highest political levels that China does not wish to see this escalate into anything more than a spat at the moment, and that it won’t trigger off a huge trade war between Europe and China. That is at least the analysis I have heard, and I hope it is true. It is hard to sustain the argument that this is a real breach of common but differentiated responsibilities because, in any analysis, bringing in a price on aviation emissions does not hit the poorest in China’s society. While they think it may be the thin end of a wedge, I think Europe is right to stick to its guns and can justify its actions.

Q69 Chair: The EU has said that if a country develops its own measures to tackle aviation emissions-they call them equivalent measures-they can negotiate a sort of opt-out from the ETS. Is China likely to be able to do that?

Baroness Worthington: If it wanted to, I am sure it could. It has everything it needs-well, it certainly has the offsets. We have just heard today that China is looking at forestry credits potentially going into an emissions trading scheme. They are doing huge amounts of afforestation. They have already shown that they can deliver huge volumes of low-cost industrial offsets, so all they need to do is create a domestic market for it in their aviation industry. And it is money recycling in China, so the Chinese aviation industry pays for afforestation in China and they meet the European requirements and are freed from the obligations. They have the potential. Politically, whether they would do that and feel that they have been required to do it by Europe is another question.

George Yu: Personally, I would say that, in practice, all the airlines have already submitted data to the EU, so although on the surface they are debating, we haven’t seen any defaulting or measures taken by politicians to trigger any trade war yet. Also, only a very small number of Chinese airlines have been involved. How much that would damage their profits-they quoted 800 million Chinese currency-is another question.

Chair: Thank you very much indeed. It was a very interesting session for us and we are grateful to you for your help.

Prepared 21st May 2012