LORD TURNER OF ECCHINSWELL AND MR DAVID KENNEDY

26 MARCH 2008

  Q1 Chairman: Good afternoon, ladies and gentlemen. We welcome you to our one-off evidence session with Lord Turner of Ecchinswell. I hope I have pronounced that correctly.

Lord Turner of Ecchinswell: You have.

  Q2  Chairman: Where is it?

  Lord Turner of Ecchinswell: It is just south of Newbury, in the North Hampshire Downs.

  Q3  Chairman: Does it have some very special feature which made you choose that as part of your title?

  Lord Turner of Ecchinswell: I just happen to have a house there and I have had a house there for 20 years.

  Q4  Chairman: That seems as good a reason as any. Anyway, you are very welcome, appearing before the Committee this time as the Chair of the Committee on Climate Change. Would you clarify for me, because you are operating in a shadow mode at the moment, are you officially the Chair or the Shadow Chair?

  Lord Turner of Ecchinswell: I think that is a complexity that I usually leave for others. I guess the correct description is that I am the Shadow Chair of a shadow committee, which will become a committee at the time of the Royal Assent to the Bill. I have to say that we are simply, as a committee, getting on with the job that we need to do since we are on the hook to produce some reports by December this year, so we need to proceed as if we are in full operating mode.

  Q5  Chairman: I gather, then, from that that you have already met as a committee as such. Are you able to give us at this early stage a flavour of the type of thing that you have been considering? You said that you had to produce a report by the end of the year, and so I presume you have been focused on formalising your work programme and how you are actually going to achieve your objective. Perhaps by way of introduction to your work, you could tell us what you have been up to since appointment and your first meeting.

  Lord Turner of Ecchinswell: We have had two meetings of the committee so far. Those have built upon the very extensive work which has been done by the secretariat, which has existed in a shadow fashion for about five or six months now and which has done a lot of basic preparatory work. We have also held four different stakeholder meetings, meetings with NGOs, with business, with interested parties in London, Cardiff, Glasgow and Belfast simply to tell interested parties that we exist and to explain our work programme. By December we have to recommend what the carbon budgets will be for the first three budgets of 2008-12, 2013-17 and 2018-22, and I think it is very difficult for that timescale, which was originally meant to be September but the whole thing has slipped a bit. It really cannot slip much more because the Government has said that it will respond to our recommendations on the budgets by March next year and, in fact, by the time of the Budget in the sense of the fiscal budget, and, indeed, we are meant to produce our first annual report on progress against the 2008-12 budget by September next year; so I think that illustrates clearly that we cannot let that recommendation on those first three budgets slip. However, we have also been asked, and we need to do this in parallel, to look at some things which were not necessarily in the original intent of the Committee on Climate Change but they have been added to our task, one of which is to advise on what the 2050 target should be, whether that should be a reduction of 60% below 1990 levels, or 80%, or anything else which is above 60%, because the only constraint is that the legislation says at least 60%, and, clearly, one wants to answer that before one freezes the budget for 2020 because the stretch in the budget of the target for 2050 carries that implication. We also have to recommend whether the budget should, indeed, be set in terms of CO₂ alone or in terms of all greenhouse gases, including the other five main greenhouse gases, and we have to recommend whether, and how, and by what time international aviation and shipping should be included within the UK budget and target setting process. So, all of that gives us a great deal of work to get done between now and December.

  Q6  Chairman: You used the words "recommend" and "advise" in responding to my question. One of the things that this Committee felt when we produced our report on the then draft Climate Change Bill was that perhaps the Climate Change Committee should have the equivalent status of the Monetary Policy Committee.[1] The Monetary Policy Committee is given a target of inflation to hit by the Chancellor, but after that it gets on and works out its own salvation, as you know, in how it directs monetary policy to achieve that objective. What happens in your case? You do all this hard work and you come up with some recommendations and, hopefully, you have not fixed it behind the scenes with the Secretary of State before your report. How are you going to maintain your independence? What are you going to do if the Government turn round and say, "We do not actually agree with this. We think you have been a bit hard. We think we want to have a different set of targets and recommendations"? Are you going to sit back, lamely and quietly, and not comment at all or are you going to develop a state of independence and, if necessary, speak out?

  Lord Turner of Ecchinswell: I think it is worthwhile being clear about where the analogy with the MPC works and where it breaks down. At one level it works, in the sense of this is an independent body set up by statute with clear independence from the Government. What is different is two-fold. First of all, of course, the Bank of England itself does not even recommend on what the target should be; it simply has to take the target as actually defined by the Chancellor. The 2% plus or minus 1% is not something even advised by the Bank of England, it is defined by government. So, at one level, in relation to what the target should be, the monetary policy of the Bank of England has less independence that we do. In relation to then hitting the target, of course it has total independence, but that is because in relation to inflation policy you can define one specific lever, the interest rate, and you can give that to an independent body to call up or down. You cannot really do that for the Committee on Climate Change, because otherwise you would have to give them pretty much the whole of government policy because the levers that we could pull cover building regulations, they cover speed limits, they cover appliance regulation, they cover the design of the EU ETS, they cover taxation, et cetera. So, I think one can accept that you cannot have a body for climate change which is given complete independence in pursuing a target, and so we end up with a remit which is two-fold: to recommend on what the target should be and also, necessarily, to recommend on what the policies are going to have to be to have any chance of hitting that target. We cannot end up saying what a target is for 2020 without also describing why that is a credible target. It is, therefore, a fuzzier issue than the independence of the Monetary Policy Committee of the Bank of England. There is not a nice, clear design of who sets the target and who is responsible for delivering it, but, that said, we are going to be robustly independent. We will develop our own point of view on what the target should be in order to achieve the overall objective of the world stabilising climate change at below dangerous levels, we are going to set out our point of view on what the budget should be and then we will have to see how the Government responds to them. I think, necessarily, when the Government responds to our recommendation, it would be odd if we did not respond back and, therefore, if there were a very major divergence I think we would expect to see and, indeed, Parliament would expect to see and, indeed, I think the legislation requires that there is an explanation to Parliament of why the recommendations of the Government have diverged from the recommendations of the committee. I think there is going to be a dialogue on that and we certainly hope that the Government is going to end up with a formal policy which is very close to our recommendations, but I think one has, to a degree, to play that by ear within the context of the fact that we are an independent body which has been charged by government with having an independent point of view.

  Q7  Chairman: You have got a long track record of being involved and developing an understanding of climate change issues. I have read a couple of your articles. You have not been backward in coming forward and stating your views about climate change, the response to the Stern Report, and so on. Are you going to be able to maintain, as Chair of this body, the ability to continue to comment in the wider sense about climate change issues, particularly if having got agreement, if you like, from the Government to the recommendations, the track is set, the direction of travel is clear, but then, for whatever reason, for example, we started to deviate, we dropped behind the target? Are you going to be able to stand up and say, "Something is going wrong, this is what I think it is and these are some thoughts as to how we get back on track"?

  Lord Turner of Ecchinswell: I think that is clearly within the official remit of the committee, because we have to present reports each year on the progress towards the budget that we are then in the period of. So, in September 2009 we have to produce a report, and all we will know then is the 2008 result, so these reports will get more meaningful over time, but once we are up and running and we have got a couple of those underway and we can see the trend relative to the budget, we are charged by Parliament within the Bill of commenting upon the progress against the target, and it is pretty obvious that it is not the intent of Parliament that our report simply says, "The target said this, the figures are that", end of report. Such a report in itself would take two lines. I think it is the clear intent that if we are off target we will comment on the reasons why, which policies are working, which policies are not working, whether new information has given us a greater understanding. I think also in those reports necessarily we will try and look at where in the economy we are off target, if we are off target. It may be that what we will end up with is going faster in reductions in some areas, be it transport or domestic residential buildings, slower in others, and we will comment on that. So, we will comment on the sectoral balance, we will comment upon whether we are on track and that commentary will necessarily have to involve a point of view on, if we are off track, why are we off track and how we need to get back on track.

  Q8  David Lepper: I have a point on procedure. When you produce a report for government will that report become public at the same time that it goes to government, or will it go to government first, leaving aside the issue of leaks?

  Lord Turner of Ecchinswell: I would have to remind myself, and I should know the answer to that, it is there in the Bill. The answer is it has to be laid before Parliament. The report which we produce by the Secretary of State, there is no ability for it to be sat upon. I think there is some time within it of when that has to go forward and when the Secretary of State has to respond on behalf of the Government as to what their reaction is, but these will be public reports, effectively, yes.

  Q9  Chairman: Do you think Parliament ought to debate your report on an annual basis?

  Lord Turner of Ecchinswell: I think that would make absolute sense. At least it should debate the response of the Government to our report. It does not necessarily need to have to have two bites of the cherry, but I think it is clear within the legislation that when the Government does propose its response to our reports there would be a debate at that time.

  Q10  Dr Strang: As you know, following the Bali summit, negotiations are now beginning to produce targets for individual countries, developed and developing countries. How important do you think the Climate Change Bill is in this context in demonstrating to the world that Britain means business here and we really will achieve cuts in our emissions?

  Lord Turner of Ecchinswell: I think the Bill is important as a commitment to cuts in our emissions. I think the further decision which will come after our recommendation on the 60%, 70% or 80% will also be important, and I think the budget which is set for 2020, which by the Bill has to be at least 26% below the 1990 level, will also be important; so I think there is within the Bill a clear statement on behalf of the UK Government and UK Parliament that we are on, as it were, a non-negotiable downward path—non-negotiable internally, I did not mean that in an international negotiation sense. The fact that we are committed completely to reducing our carbon emissions is set out there, and that is a useful stance, vis-a"-vis the rest of the world. It will be important also to back it up with achievement. There is only so far that you can build credibility in international negotiations by the forward commitments that you have made rather than by the proof that year by year, or at least two years by two years, or three years by three years you are on some sort of downward path, and I think that is the next challenge, because at the moment, as we know, for the last four or five years we are pretty much flat in terms of our emissions and we need to get them on a downward path, I think, to build our credibility in international negotiations.

  Q11  Dr Strang: On the question of renewables, as you know the European Union has its 2020, 20 target, as it were, to secure 20% of the European Union's needs from renewables by 2020. Would you like to express a view as to what our target might be within that European Union objective and how it might be achieved?

  Lord Turner of Ecchinswell: I will not express a point of view in a quantitative sense on that target right at the moment, though that is something that we will be thinking about carefully during the course of the year. One of the challenges that we have, or one of the things that we have to think about within the committee, is the extent to which we accept international arrangements or European arrangements, as it were, as external givens for our work or things where we might be to a degree recommending things, which in itself carries implications for the UK's negotiating stance within that, and that is going to be a tricky and not black and white thing to work out. For instance, there is going to be a European Emissions Trading Scheme, we know something about the basic structure of that, nobody would suggest we challenge that, but actually what exactly that will be in phase three, how tight will be the national allocations, how much will be auctioned, how much not, is not yet fixed and, therefore, we will have to operate in an environment of, on the one hand, keeping an eye on what is steadily being agreed at European level and at another level, where it is not fixed, being aware that our recommendations might in themselves feed into that. In relation to the 20% renewable energy target, there is now a clear commitment of the European Union and of the British Government to that. There are standard burden-sharing processes which the Commission will be working at. One can hazard some sort of guess, I am not going to give the figure now, of what that might end up with for particular countries, and we will be having a point of view of where that is likely to be for the UK on standard burden-sharing approaches and, crucially, what that implies for renewable electricity, because the most crucial thing is that that 20% renewable energy target is a renewable energy and, given that it is much more difficult to achieve renewable energy outside the electricity sector, it is going to imply a much higher figure both at European level and at UK level in relation to renewable electricity. So I am not going to give you a figure here, but I think, and I cannot remember whether it is the third or the fourth meeting of the committee, one of our key agenda items will be to go through the framework of international commitments we have made, in particular EU commitments, and what that implies about the constraints within which we should operate.

  Q12  Dr Strang: Okay, I think you have said as much as we can expect on that. One final question. Would you like to comment on the feed-in targets?

  Lord Turner of Ecchinswell: I think it is an issue which is going to have to be looked at at some stage, the balance between the ROC approach and the feed-in tariff approach. The ROC approach is a very clear, economic theory way of making sure that you try to buy your renewable energy at least cost to the taxpayer—that is how it has been devised—and it can, therefore, have some advantages in terms of achieving one's ends at least cost. I think it is clear right now that so far it is driving less progress towards renewable electricity than the feed-in tariffs which have been applied by, for instance, Germany or Spain. Of course, you can turn around and say, yes, but they have bought their renewable energy at a quite expensive level and perhaps an unnecessarily high expensive level, so that is an issue which I do think needs to be looked at, the relative pros and cons of feed-in tariffs versus ROCs. What I think is highly likely is if you want to generate a large amount of small-scale, decentralised renewable energy production, as may be required within the zero carbon homes commitment for 2016, which cannot be achieved entirely by insulation, which requires at least some degree of distributed renewable energy generation, I think there is a really open issue as to whether the ROCs regime works for small-scale players like that. The ROCs regime is necessarily somewhat complicated; it establishes a reasonable expectation of a future market price which is understandable to large-scale, sophisticated players in the generating market. I think it is unlikely to work if we are going to go down the route of encouraging people, as in Germany, to put solar panels on the roof of their house and sell that to the Grid. That may suggest that a mix of both policies may be required in the long-term.

  Q13  Dr Strang: I think you are being understandably cautious, but presumably in due course—

  Lord Turner of Ecchinswell: In due course that is something we will look at.

  Q14  Dr Strang: It is up to you and the committee to say, "Look, we have really got to get down this road pretty quickly"?

  Lord Turner of Ecchinswell: Yes, in due course we will do that.

  Q15  Mr Drew: Can we pick up your point about trading and international carbon credits? This Committee did recommend, when we did our report, that at least 70% of the impact of reducing climate change should be purely domestic, and there were, and I think it is fair to say still are, concerns about using emissions trading and there was an amendment in the Lords to that effect. We will not embarrass you by asking you whether you voted on that.

  Lord Turner of Ecchinswell: I will tell you.

  Q16  Mr Drew: All right, you can tell us. Where are we in the great scheme of things?

  Lord Turner of Ecchinswell: I think it is important here to distinguish the principal and also the specific form of any amendment which is put forward or, in the case of the Lords amendment, it has been passed, so the Government now has the decision as to whether to reverse that or to amend the amendment when it comes back to the Commons. Overall emissions trading can be an important part of the overall armoury of techniques that we need to deal with this problem. The arguments in favour are that it should, in theory, enable us to buy emissions reductions at least cost, and that is an argument that can apply at the level of Europe, hence the EU Emissions Trading Scheme, or, indeed, at the level of the whole world. Indeed, I think in the long-term, probably our aim should be in many centres of the economy to have a global emissions trading system with global caps. We are not there yet in terms of global caps, and therefore we have something which is separate from the EU ETS, which is the purchase-in of emissions credits generated by reductions under CDM or JI projects. Again, those can be justifiable on two bases. First of all, they can be a way of achieving emissions reductions at low cost and, secondly, they can be a beneficial flow of finance for helping the movement of developing countries towards a low carbon economy. Indeed, those reasons why one should be in favour of emissions trading was why in the Lords debate Lord Stern actually said, do not constrain too much the use of emissions trading. However, I think Lord Stern recognises, and I certainly recognise, that in the long run you cannot rely on emissions trading to achieve your reductions. Indeed, I said in my speech on that House of Lords amendment that we have to work on the assumption that when we think about 2050 all of our reduction problem has to be domestic, because by 2050 you have no good reason for believing that there will be cheaper emission reduction targets anywhere else in the rest of the world. If we are to deal with this problem, by 2050 we will have to have the whole of the world on a downward path of emissions reductions and subject to binding caps, and at that stage there is no sound basis, from now looking forward, to believe that we will be able to be a net buyer of credits rather than a net seller of credits. China may by that time not want to be a net seller; it may want to be a net buyer. So the only reasonable assumption for the 2050 target is that, if we say that we must try and get our emissions down by 80% by 2050, we have to tell a story of a technological path whereby we and other advanced economies can run our economy with 20% as much carbon emissions domestically as we have at the moment. In the long-term we have to get the emissions down, and that is why there is also an argument for being cautious about over relying on the buy-in of credits on the path there. There is a legitimate role for it in the first, second and third and subsequent budgets, but unless we make progress domestically towards radical domestic cuts in the long-term, we are not achieving what we want to achieve. That is the background and that is why I am in favour, in principle, of emissions trading, but I certainly see the argument for making sure that we have an adequate level of domestic reduction as well. The reason why I actually spoke against the amendment in the Lords gets to the particular way that it is defined. If you define it as at least 70% of the reduction has to be domestic, you can produce a perverse result, which is this. Imagine two things which the committee might recommend. Suppose the committee recommended that by 2020 we should get an 18.2% reduction in domestic emissions and a 7.8% reduction achieved by buy-in of credits, a combination of 26%. That, under the Lords amendment, is legal because it hits the 26% and it hits the 70%. Now, suppose we, alternatively, want to recommend a 20% domestic reduction and a 10% reduction achieved by emissions buy-in for a total 30%. That is illegal under the Lords amendment because 20% is less that 70% of 30%, and that is why my argument was that those who wish to propose that we have a limit within the Bill should define it as a minimum level of domestic reduction, not a minimum percentage of the total reduction which should be achieved by domestic. If people wanted to come back and say that the minimum reduction by 2020 achieved domestically should be 18.2%, ie 70% of the 26% minimum, I am much more sympathetic to that than to defining it as 70% of the total figure. I think it was simply technically wrongly designed for the objective which it is seeking to achieve.

  Q17  Miss McIntosh: Can I pursue this. You alluded to the European emissions trading system, which is very much in outline—we do not know specifically what it is going to say—you alluded to aviation and shipping, and yet road transport is by far and away the largest contributor. My concern is that we do not know within the context of the Climate Change Bill as it currently stands, it does not actually set out, what the relationship will be between a UK emissions trading scheme and a European emissions trading scheme, and it is my understanding that we could be faced with the possibility of having four separate domestic trading schemes, one for England, one for Scotland, one for Wales and possibly one for Northern Ireland. Have you considered this in the committee and, if you have, why did you not perhaps look at tabling amendments to that part of the Bill in the Lords?

  Lord Turner of Ecchinswell: Can I explain that my overall attitude to the Bill going through the Lords was that I was not myself going to get into the business of tabling amendments. I think it is slightly odd to, as it were, rewrite your own job description. I think you have to leave that to other people to do, albeit I did comment on that one amendment, simply because I think it could have been better written as an amendment and I think it could have perverse effects in limiting our freedom of action. You are absolutely right that the legislation allows certainly Scotland, and I imagine you are also right in relation to Wales and Northern Ireland, to set up their own emissions trading schemes. When we were in Scotland recently and I met the Minister for Climate Change, he made it clear that it was not their intention to use that to set up trading schemes within Scotland and, indeed, I think there may be disadvantages in setting it up at a small geographic area level. The whole logic of an emissions trading scheme is to widen the geographic area across which you are searching for least cost emission reductions and to be able to trade; so there is something not right about then getting it down to a very specific, narrow level. I have to say, my present stance would be that although the legislation allows the devolved administrations to set up their own trading schemes, I think they should be fairly cautious about using that legislative freedom. Within the UK, of course, we are now committed to two trading schemes, one of which is entirely national and the other of which is at European level. The European level is the EU Emissions Trading Scheme, which covers energy intensive sites, large individual sites, which are in themselves large emitters of carbon. We are now also committed to the Carbon Reduction Commitment Scheme, which will cover large energy users who have multiple sites, like hoteliers, retailers, the retail banks, where the totality of their organisation's output is large even though the output from one individual site is not large. I do not think there is a problem with those two schemes; I think they have a clearly defined separation. It will be clear which sites are a member of which scheme and which are not and I think there is a fairly clear defined relationship—it is a one-way-street only relationship—between the Carbon Reduction Commitment and the European Emissions Trading Scheme, and so I think at the moment we have in those two schemes a fairly coherent policy mix. I think one can accept that if one was to proliferate lots and lots of trading schemes, one would have to look carefully at that and about the coherence of the relationship between them, but I think at the moment they are coherently related. I might add one extra point, which is within my comment on the last scheme. Of course, it is important within the European Emissions Trading Scheme to realise that we cannot actually in advance define the maximum amount of buy-in which will occur from the rest of Europe to the UK. That is not a policy variable which the UK Government or any other government can pre-fix within the scheme. The amount of buy-in will be whatever the market determines and will only become clear as we move towards the end of a budget period.

  Q18  Miss McIntosh: Are you prepared to comment just on the road transport aspect? Should we not focus on the biggest polluter?

  Lord Turner of Ecchinswell: I think one should be open-minded as to whether an emissions trading scheme is the correct way to go on that. There is a whole series of policy levers there. There is a regulatory policy lever through the voluntary and possibly the mandatory emission requirements on new cars being sold, though I think it is notable that at the moment we do not have the equivalent on light trucks and heavy trucks. We have much more of a framework of policy as it relates to the passenger car side of that than to the light trucks and heavy trucks. We have the bio-fuels issue, though that, of course, is contentious, and we have fiscal instruments, such as the fuel duty, but also, in particular, the new first-year vehicle excise duty. I think one has to look flexibly at all of those policy levers. What is clear is that transport is an area that we have to look very carefully at, because if you look at the last 15 years, the trends for industry, the trends for power generation, the trends for domestic emissions have been broadly flat. It is transport, both in its road transport aspects and in its international shipping and aviation, which in a developed world have been driving increases, so we have to have a way of dealing with that, and they are not covered by the existing trading schemes.

  Q19  Lynne Jones: Have you any thoughts on what measures need to be taken to ensure that the price of carbon in carbon trading schemes adequately reflects the costs of carbon emissions and also what needs to be done to ensure that we have consistent and verifiable carbon accounting?

  Lord Turner of Ecchinswell: On the latter, consistent and verifiable carbon accounting, actually we were intending to do it in one of our first two meetings but for scheduling reasons it has got a bit delayed. We will have appropriate people coming to us who can explain how the carbon accounting works and we will be going through the details. Obviously, when you set about an exercise like this, one of the first things you need to do is to assure yourself that the figures are complete and precise, and I should say on that that there is both the veracity of the carbon accounting and there is the speed at which we get the figures and the extent to which they are subject to adjustments. That is going to be something we are going to have to think about carefully in terms of when it makes sense for us sensibly to comment. The one thing I would say on all of that is that actually, in relation to CO₂ itself from energy use in developed countries, it is probably quite good, because we pretty much know how much petrol, how much diesel is burned, how much coal is used at power stations, et cetera: given the nature of the fuels that are used, given the fact that many of them are subject to taxation regimes or given the fact that they are burnt in concentrated amounts, those figures are fairly good. I think the areas which are much less certain are things like the other greenhouse gases. The level of precision on some of those emissions is probably not as great as it is from CO₂ energy and also things like land use, and so we are going to look very carefully at the dependability of the data which exists outside the CO₂ from energy fuel burning, which is probably the most precise of all the categories. In relation to the cost of carbon emissions, as has always been debated in the economics of climate change, there are, as it were, two ways to proceed: either to try and work out the marginal social cost of emitting carbon and then to say, "I want to set the price of emitting carbon at that", and the quantity is whatever the quantity is for that price; or there is a way of starting from the quantity end, which is the UK has got to get its emissions down by X% by 2050, by X% by 2020. Therefore we think the EU emission trading system target should be this. Therefore, the price is whatever results from that quantity constraint. I have to say that I am somewhat more favourable to the latter approach than the former. I think attempting to work out with any degree of certainty the social cost of carbon is an exercise where you end up with an enormous range, and although it also involves judgments, it is somewhat easier to proceed on the basis of saying we believe the world needs to avoid X degrees centigrade temperature increases, the scientists tell us to avoid that with a high degree of probability, we need to limit the concentrations to this amount. To limit the concentrations to this amount, we need to be on this emissions target. We are, therefore, going to commit to these quantity reductions and, once we have committed to these quantity reductions, the price is what the price is. I think that is probably the more tractable approach to this problem than trying to have a debate as to whether the marginal social cost of carbon in any one year is 40 dollars, 50 dollars or so many euros or pounds.