The Oxford Energy Festival
Thursday, 12 November 1998
Lord Marshall of Knightsbridge
Chairman, British Airways
and Chairman of The Chancellors Energy Task Force
I dont know how many of you pay regular, daily visits to the correspondence page of The Times newspaper, but those who do will know that there has been something of an energy debate taking place in those august columns of late.
One correspondent concluded last week that the biggest threat to the environment was human population growth and the increasing levels of heat generated by the extra bodies. Not so, claimed another contributor.
If I read his letter correctly, this chaps theory was that increased numbers of people (and livestock, come to that) would, in fact, remove carbon from the atmosphere in the process of building additional quantities of flesh and bones.
The message here seems to be that we need not, after all, worry too much about industrial energy use and the release of carbon deposits into the atmosphere, but simply breed more people to clean up the planet.
I could not resist the thought that it might have been helpful if this person had written to The Times with his advice before I embarked on seven months hard work with the Chancellors Energy Task Force.
Far be it from me to take issue with that, shall we say, unusual, argument, but the nature of the letters page dialogue served to reinforce the urgent need for wider, more open and more accessible public debate on the complex issues of environmental conservation in this technological age of ours.
I congratulate The Millennium Debate on its initiative to stage the Oxford Energy Festival, as a special sequel to the Earth Summit in Buenos Aires. I was delighted to be invited to help launch the festival, although I do so with some trepidation, in the knowledge of the excellent, high-quality programme arranged over the next seven days.
The Festival organiser, Raymond Foulk, invited me to come along and talk about the work of the Energy Task Force and the report we handed into the Chancellor last Tuesday week; and I am happy to do so.
One very busy day in March this year, I received a message that the Chancellor of the Exchequer wished to speak to me. A call from number 11 Downing Street is not the kind of summons that a businessman can afford to ignore and so I duly went along to meet Gordon Brown.
The Chancellor wanted me to undertake an urgent review of whether new economic instruments could improve the industrial and commercial use of energy and to reduce greenhouse gas emissions; and if so, how best to use them?
He wanted to set up a Task Force of senior civil servants to consider and report on the subject in time for the November Budget Review and invited me to lead it. To most people - especially the media - the phrase, economic instruments meant just one thing: energy tax. The work of the Task Force was, it seemed, likely to be contentious and possibly thankless.
The background to the Task Force came from the 1997 Kyoto Conference at which the developed countries agreed legally binding targets for reducing emissions of the six specified greenhouse gases by the period 2008-2012. The European Union committed its member states to a reduction of eight per cent on 1990 levels.
For the record, those gases are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride.
As our share of the EU commitment, Britain agreed in June of this year, the legal target of a 12.5 per cent reduction over the 1990 level. This means finding at least a further five million tonnes of carbon, over and above the emissions reductions to be achieved by existing policies. We also have our own domestic goal of delivering a 20 per cent cut in carbon dioxide emissions on 1990 levels by 2010 which translates into a reduction of 29 million tonnes of carbon.
Clearly, these are extremely challenging aspirations which prompt serious changes to the way in which we live and do business in this country. The main greenhouse gas, carbon dioxide, is, as we know, an inevitable product of the consumption of fossil fuels (coal, oil, gas, petrol and diesel) to provide heat and power for our homes, industry, transport and - dare I say it - centres of education. In Britain today, the energy derived from these fuels is integral to virtually every aspect of our daily lives. Finding ways of reducing carbon dioxide emissions presents a considerable environmental challenge.
The Government presently expects to ratify the Kyoto protocol in 2000 or 2001 and has recently initiated consultation on its broad approach towards achieving the UKs commitments. The consultation document, UK Climate Change Programme issued last month says that the Government will aim for a balanced and cost-effective programme involving all sectors of the economy. Thats good - and I have been pleased to see a number of ideas in the paper for possible policy options on transport and household energy use. Action across the board is essential, because industry cannot pick up the tab for everyone.
This is not to say that business does not have a significant part to play. Though they have fallen, emissions from industry and commerce are still big polluters. Business energy use still accounts for around 40 per cent of all UK carbon dioxide emissions.
The focus of my Task Force, then, has principally been on CO2 as the most prevalent greenhouse gas and on the Governments stated manifesto goal. It led us to look at the industrial consumption of carbon emitting fossil fuels, but our concentration was on fuels used for energy - lighting, heating, motive power and power for machinery.
My overriding concern was to look at what mechanism, or mechanisms, would allow business to reduce carbon emissions and make its contributions to the Governments target most cost-effectively and with least damage to the competitiveness of British companies. My working assumption throughout was that any revenues raised by an instrument would be recycled back to business, so that although companies incentives would change, the overall impact would be financially neutral.
We also had to be aware that the targets being focused on so sharply were not, in fact, the end of the story. Commitments agreed at Kyoto are only the beginning if we are really going to tackle the threat of climate change. It was salutary that the publication of our report coincided with the unfolding of the appalling climate-change disaster in central America.
The implementation of the Kyoto Protocol may slow the rate of change, but it will not reverse it. Indeed, even more challenging requirements are expected to emerge from future international negotiations for the period beyond 2012.
In looking at the options we have tried to keep in mind that whatever programme the Government designs, it will need to look beyond the current round of targets and provide long-term, continuing dynamic incentives to reduce emissions.
This is, in fact, a competitiveness issue in itself, because the working life of some capital investments can be very long in some industries. British Airways, for instance, last week retired its first Boeing 747 jumbo jet after 28 years service in which it travelled more than 51 million miles. Without an imminent signal of where commerce and industry needs to be beyond 2012, there is a risk that companies investing now could get locked into capital stock which does not meet future requirements. To advocate doing the bare minimum now could provoke more costly and painful change than if action was taken in synchronisation with the investment cycle.
We set about our study by consulting as widely as possible with interested parties, in the time available. A total of 143 organisations and individuals responded to a consultation document issued in June. Many of the business respondents were big companies, but we also ensured that the views of small firms were heard. Consultations were supplemented by helpful seminars with industry and environmental groups, organised for us by the Green Alliance and the Confederation of British Industry.
There was obviously much to be gained from the work of others who had already looked at the issues we were addressing. A particular debt was owed to the Advisory Committee on Business and the Environment (ACBE) whose report, Climate Change - a Strategic Issue For Business, provided a valuable starting point for our own review.
Clearly, we do not have time this morning to go through the results of consultations in any great detail. Suffice it to say that a very wide spectrum of opinion emerged, with no clear consensus as to the right solution.
On the basis of published projections, UK emissions of greenhouse gases are expected to be only seven per cent below the 1990 baseline in 2010 - that is in the middle of the Kyoto commitment period. Main reductions in emissions since 1990 have taken place in the energy and business sectors, with the biggest effect coming from fuel switching in electricity supply. After 2000, these falling trends are expected to flatten out, or even reverse. Domestic emissions decline only slightly and transport is on a rising trend to 2010.
While industry has made substantial progress to date, to say that more reduction in energy use and greenhouse gas emission is required to meet the legal Kyoto target, or move further towards the Governments domestic CO2 goal, would appear to be something of a gross understatement.
We considered the entire range of actual and potential instruments - including regulation; voluntary agreements; negotiated agreements; and subsidies.
The answer to the question posed by the Chancellor of the Exchequer began to emerge quite soon during the consultation process. There was, indeed, a role for economic instruments in helping to improve the business use of energy and in reducing greenhouse gas emissions, to work as part of a harnessing package alongside existing regulations, voluntary and negotiated agreements and other measures, together with appropriate action on the part of other sectors not covered in the Task Forces remit.
The consultation narrowed in on two main options: a system of emissions trading on a base of fixed quotas; and a tax. These formed the crux of my recommendations to the Chancellor. Let us look at each of them.
The system of international greenhouse gas trading covered in the Kyoto protocol, designed to be in place no later than 2008, will be part of the long-term solution to reducing emissions; and I was pleased that international trading would be available to the UK as part of the solution to achieve our commitments. Any trading system will require a robust system of monitoring and verification; and a starting point for this could be the framework provided by the Integrated Pollution Prevention and Control Directive.
Practical considerations lead me to conclude that it might not be sensible for Government to introduce a fully-fledged statutory scheme for the domestic market, at this stage.
Nevertheless, I have urged the Government to step up its consultations with interested parties to resolve the complicated issues involved in designing a trading scheme. In particular, strong business input into its design will be essential. Such consultation should set up the UKs negotiating position for the international scheme, as well as develop domestic expertise, so that British firms are ready; and our financial institutions well-positioned to lead in these new markets.
As a first step, I have recommended that the Government should seriously consider a dry-run pilot scheme with interested players across several sectors, as soon as possible, as a means of learning lessons for the active participation of British commerce and industry in the international scheme.
Even when the international trading scheme is fully developed, it is extremely unlikely that all businesses could be involved. I doubt, in fact, whether it will ever be practical for the majority of small and medium sized enterprises and less-intensive users in industrial and commercial sectors to participate in the international trading scheme. Collectively, these companies are responsible for about 60 per cent of total carbon dioxide emissions from business and they offer scope for significant improvements in energy efficiency and reductions in emissions.
Therefore, my conclusion is that there probably is a role for a tax if businesses of all sizes and from all sectors are to contribute to improved energy efficiency and help meet the UKs emission targets.
In order to help businesses plan for future investment and maximise the environmental impact of a tax, clear indications should be given of the long-term direction of policy, with the introduction of and changes in the rate of tax made in a gradual and predictable way. Importantly, any tax must be designed so as to protect the essential competitive position of British industry and to this end, I have recommended that:
The revenues are recycled in full to business, with at least some of the money channelled into schemes aimed directly at promoting energy efficiency and reducing greenhouse gas emissions, perhaps through carbon trust type schemes to foster low carbon technologies and/or energy audits and advice for smaller businesses;
Consideration should be given to the treatment of energy-intensive industries, with the aim of reducing the overall impact of the heaviest users, while retaining some incentive for all users to save energy at the margin. A system of rebates, perhaps with the relief targeted at plant level seems to be the leading option here; and
Any measures are subject to detailed consultation about their design.
Given present policy objectives for the domestic sector, the leading option for a tax would appear to be a downstream levy on the final use of energy by industrial and commercial users, with the tax rates reflecting the carbon content of different fuels.
I believe it is also important that the design of any tax should ensure that Combined Heat and Power is not disadvantaged; and it should also aim, where possible, to increase incentives for the use of renewable sources of energy.
Of necessity the Task Force survey was a brief one and more work will be needed before the Government can implement practical solutions based on our findings and recommendations. Much to the disappointment of many people - notably the media looking for a snappy headline - I have not proposed a level of energy tax. That is not to say the Task Force did not look very carefully at possible taxation models. It was deduced, for example, that a downstream energy tax which broadly reflected the average carbon content of different fuels and that would produce an overall revenue of around £1 billion a year, might reduce carbon dioxide emissions by around 1 million tonnes per annum by 2010. On the scale of targets, this would equate to 0.7 per cent of the UKs CO2 emissions in 1990.
In another example, Cambridge Econometrics estimated that a downstream tax on business, with tax rates reflecting the carbon intensity of each fuel, starting at $1 per barrel of oil equivalent in 1988; and rising to $13 by 2010, would save about 7 million tonnes of carbon a year in 2010.
I suppose it was inevitable that we should face criticism from commerce and industry for coming out with recommendations that appear to be too tough; and from the environmental lobby for being too soft.
Our remit was to assist the Government - specifically the Chancellor - in answering a question. The toughness or softness of any consequential action is for Gordon Brown and his Cabinet colleagues to decide.
What is not in doubt is that, against the force of Kyoto and of plain common sense, the action of new economic instruments is needed sooner, rather than later.
If the Task Force and my report has moved the environmental debate on and brought the responsibilities of commerce and industry into much stronger focus, we have made a worthwhile contribution.
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