Debate on the Address

Part of the debate – in the House of Lords at 4:29 pm on 27 November 2006.

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Photo of Lord Vallance of Tummel Lord Vallance of Tummel Spokesperson in the Lords, Trade & Industry 4:29, 27 November 2006

My Lords, I add my congratulations to the noble Lord, Lord Bilimoria, on his highly refreshing, entrepreneurial maiden speech. For my own part, I shall take up the theme introduced by my noble friend Lord Newby in his excellent speech and address the business end of climate change, following the Stern review and the Climate Change Bill. I should mention my interests as a member of the supervisory board of Siemens AG and of the president's committee of the CBI.

The Stern review is an excellent ground-clearing exercise, which has allowed us to put behind us the scientific and economic cases for early and purposeful action on global warming. We are now free to concentrate on the difficult part; that is, the action that needs to be taken. The Government are to be commended for bringing forward a Climate Change Bill. It is right that the UK, in its inevitably small way, should set an example. Yet, the UK apart, we are still left with the real and substantive issue of what is to be done on the wider stage to address the global challenge of climate change on a meaningful scale.

The Stern review recommends action to mitigate global warning on three fronts: first, the establishment of a carbon price through taxation, trading or regulation; secondly, the development of a range of low carbon and high efficiency technologies on an urgent timescale; and, thirdly, the removal of barriers to behavioural change.

We might usefully ask ourselves where a betting man might put his money between these three broad approaches. They are not mutually exclusive, but reinforce each other. In deciding where to allocate our resources, we would do well to have a clear idea of which of them offered the best chances of success.

My guess is that our betting man would take the view that useful behavioural changes might be induced in some sections of society in some enlightened parts of the world over an uncertain timescale. Taken as a whole, this would be a worthwhile contribution, but the track record of self-denying ordinance across the globe is less than encouraging. While useful progress can be made, this runner has not shown encouraging form, and a modest flutter would be the most our punter would chance. He could well raise more enthusiasm over the prospects of carbon taxation or the emissions cap and trade schemes—taxes are more amenable than people.

Our betting man might, like me, favour an upstream carbon tax as potentially the most effective and comprehensive instrument available. But, there again, he would observe that, as such, a tax bears directly on electorates—and the odds on Governments across the world having the courage to promote it are less than overwhelming. So he might prefer to bet on cap and trade schemes for industry, which have had a modest run in the European stakes and in some parts of America. But no one seems too keen to put the permits up for auction, which is the way to make them bite. He might also feel that, as we have repeatedly failed to bring a relatively simple WTO trade round to a conclusion within an established negotiating framework, the odds are stacked against introducing a comprehensive raft of carbon trading schemes that extend beyond Europe, across the entire USA and to those parts of the world that really count—China and India. He might wager a slightly larger sum here. He would not want to give the race a miss altogether, but neither would he bet his savings on the outcome, let alone the future of our planet.

It is on the development of a range of low carbon and high efficiency technologies that I can picture the truly discerning punter feeling for his wallet. Then he has a real track record to go on. He will have noted that industry and technology tend to come up with the goods in short order when three basic conditions are met. First, sufficient financial resources and incentives are made available; secondly, that Governments and regulators establish a suitable competitive framework; and, thirdly, those same Governments stand back and let science and business get on with the job. He will also have noted that when industry and technology solve the problems of carbon emissions, the solutions are enduring and not dependent on a permanent enforcement regime of taxation and regulation.

My first plea is that we place our bets wisely and spend at least as much time, effort and resource on the boiler plate of technology and industry and on creating the conditions for success that I have just outlined, as we do on our natural inclination to legislate tax and regulate.

What does that mean in practice? I would like to look briefly at the resources and competitive frameworks. The Stern review has something interesting to say on both. On the resources front, what leaps out from the pages of the review is a massive market failure. We are faced with an incredible paradox. As the threat of global warming has become increasingly significant over the past 20 years or more, so have both public and private investment in energy, research and development gone into steep decline. This is madness and something that simply must be addressed.

In what I found one of the less convincing sections of the review, Stern suggests a doubling of investments in this area to $20 billion per annum globally, on the grounds that this would get us back to the levels of the 1980s. It is always incredibly difficult to determine how much to invest in research and development. There is never a right answer. But there is a right question here: why is the proposed investment in technologies, which could save the future of our world, less than we currently spend on research and development in defence? It makes no sense to be so lacking in ambition. Let us face it: if we get this one wrong, we may have nothing left to defend.

On frameworks for investment in a portfolio of new technologies, Stern makes a sound point in concluding that individual nations' efforts will not have the direction or scale to come up with the answers we need across the globe. In other words, a series of initiatives such as the UK's Energy Technologies Institute, although on the right track, cannot cut the mustard.

At the other end of the spectrum, we have the recent announcement of a $10 billion international investment in the development of the world's first nuclear fusion reactor. This is excellent news, as it gets closer to the scale of resources we need. An internationally co-operative venture into a long-term, long-shot technology is entirely appropriate. But we should recognise that there is no competitive edge in this structure and that, at some point, that spur will need to be provided if real progress is to be made on implementation and rapid dissemination. What is missing between the two extremes of sub-scale national endeavour and non-competitive international co-operation is a competitive framework on a scale sufficient to bring about rapid acceleration in the development of medium-term technologies such as carbon sequestration and photovoltaics—something commanding the resources to make a major difference in advancing practical, cost-effective solutions that can compete with the traditional means of generating power through burning oil and coal.

The answer is staring us in the face. We have the necessary scale of financial resources, technology and skills within the European Union. Indeed, a coalition of the willing already exists at the European level. At the same time, a European initiative in this area would engender a truly competitive race with the United States, as they would have to follow suit in their own economic interests. That is where real progress can be made—if Europe and the United States run neck and neck, co-operating only in the sense of deliberately competing in the same event. How would such a race be started? First, an energy technology institute should be set up at the European level, managed by members of the scientific, economic and business communities. It should be at arm's length from the current policy and advisory activities of the Commission. The UK Government's national initiative provides something of a model, but the scale would need to be different. Next, European-wide upstream carbon tax should be levied specifically to finance the institute's energy research and development programme, at a level closer to that spent on defence research. I believe people would understand that and accept it. It simply makes sense. Then, European emissions caps should be adjusted to allow for the effect of the carbon tax. This would have the incidental effect of spreading the financial burden of mitigation more evenly between sectors. Finally, we should stand back and watch the scientific and business communities get their act together, as they generally do when given the right resources and competitive frameworks in which to operate. They got us into this mess, and they are quite capable of getting us out of it, given the wherewithal to do so.

This is not rocket science. It is much simpler than setting up a European emissions trading scheme and, dare I say it, rather more likely to be effective in mitigating warming on a global scale. It is a golden opportunity for the UK Government to take the initiative and for the European Union to show its worth.