The green challenge: more radicalism needed

Speech by Chris Huhne MP delivered to South East and Central Regional Conference on Sat 24th Mar 2007

The impact of climate change on our lives and our politics can hardly be underestimated. The consensus on the science is clear: our burning of fossil fuels is leading to global warming. Melting ice caps, retreating glaciers, rising sea levels, drought, extreme storms and hurricanes, flooding: all these flow from what we know to be happening to our planet. Over the next forty years, if we are to reduce our emissions to levels that will hand on our planet to our children and grandchildren in a state that we would recognise, we will have to cut our carbon emissions by at least 60 per cent and probably by more on the basis of the latest science. Both Sweden and New Zealand have already committed themselves to going carbon neutral - absorbing as much carbon as they emit. There is a lot to be said for ambitious simplicity.

But there is still a disjuncture between the increasing acceptance of our species' effect on our planet, and the hard-nosed economic decisions that are necessary if we are to head off disaster. We have to shift the whole basis of our economy from fossil fuels - oil, gas and coal - to renewable sources of energy. Carbon capture and storage may provide some respite for the transition, but in the end we can and should rely on wind, wave, tide and sun for our energy needs. In all cases, the technology is now there at a cost. The problem is that this change will not be driven by clear personal advantages to the end user, as was the case with the great technological changes from steam to the internal combustion engine or gas to electric light. This change has to be driven by a recognition of our collective peril as a society, and the need to avert it.

Change in other words will be driven not by short-term self-interest of individuals, but by the long-term thrust of policy. This has never occurred at a global level, and indeed it has never happened before in human history in any particular society. It therefore poses extreme challenges to mankind. And that is why it was so welcome that Angela Merkel championed the cause of climate change at the recent EU summit on 8th and 9th March, which put the European Union in the forefront of the global fight against climate change. The EU leaders set challenging targets for emissions which are to be cut by 20 per cent by 2020 (compared with the Kyoto base year of 1990), by 30 per cent by 2020 if there is agreement from the USA and other developed countries, and by 60 to 80 per cent by 2050. In addition, the summit aimed for a "binding target" of a 20 per cent share of renewable energy in overall EU energy consumption by 2020 and a 10 per cent minimum for the share of biofuels in EU transport petrol and diesel consumption by 2020. Just as crucially, the summit committed itself to kickstarting negotiations on a post-2012 successor to the Kyoto protocol. The European Union can force the global pace as it did over the Kyoto.

It is wrong to be pessimistic about a global solution. Public opinion is changing dramatically in country after country. In the UK, the salience of climate change is leaping up the list of issues. In Canada, it has now leapt to the top voter concern. In Australia, it runs ahead of tax, crime, interest rates, the economy and the war on terrorism and only narrowly behind health and education. Who would have thought that John Howard, who refused to sign Australia up to Kyoto, would be the first to announce a ban on conventional light-bulbs? Or that Canada's Tory prime minister Stephen Harper would promise to bring forward measures to cut emissions, having been elected with the support of Alberta's oil sands industry? And who would have thought that there would be - as Senator John McCain predicts - a majority in both the House of Representatives and the Senate for federally mandated emissions limits?

That is part of the answer to those in and out of Government who want us to be cautious about how far and how fast we go in response to the threat of climate change, and who fear that we can lose jobs and competitiveness if we impose tax or other burdens on businesses competing in mobile occupations. But the other part of the answer is surely that no successful economy ever became less successful by responding more rapidly to inevitable change. In business, there is a well-known phenomenon called first mover advantage. You benefit from moving first because you learn how to tackle the problems first, and build new products that can take on world markets. The third part is that renewables will be a far more secure source of energy than either gas or nuclear, both of which rely on increasingly expensive imports.

At home, we need the proposed climate change bill to put our targets into law, and to hold us on a course that needs to last decade after decade. Five year budgets as proposed by the Government are simply not good enough when the usual length of a parliament is four years, and when ministers could too easily shuffle difficult decisions onto the next Government. There have to be annual reports, and if there are annual reports, why not make the benchmark against which performance is assessed clear and transparent? It is hardly rocket science to adjust targets for both weather and the business cycle: we already make such an adjustment in assessing both monetary policy and the budget deficit. Anything else would be NIMTO targets - Not in My Term of Office targets.

But if targets delivered changes, this would be the best governed country in the world. The truth is that we need to shift the whole debate in Britain away from posturing towards planning, away from rhetoric towards reality, and away from words and towards action. We Liberal Democrats should be proud to have become the first party to put down serious plans to tackle emissions from transport, which are up by 18 per cent since 1990. Without measures to tackle the emissions from cars and planes, we simply do not have a proper climate change policy.

That is why we suggested the green tax switch: putting up taxes on the activities that emit carbon that we are trying to discourage while cutting taxes on the activities like work risk and effort that we want to encourage. That switch - with the clear guarantee that increased green tax revenue goes back to people in income tax cuts - is essential to retain public support. Without the green tax guarantee, people are rightly suspicious that the government is merely creeping up with another stealth tax. That is why Gordon Brown's doubling of air passenger duty and his rise in vehicle excise duty risks giving green taxes a bad name: they are just a grab for the exchequer.

By contrast, Lib Dem plans would take 1.5 million out of income tax altogether in sharp contrast to Gordon Brown's punishment of low earning income tax payers, who will now pay 20 pence in the pound where before they paid just a 10 pence in the pound starting rate. Under the Chancellor's proposals, you have to earn £18,600 a year before you gain from income tax cuts, an extraordinary sense of priorities for a Labour government. And because we would be more radical on income tax cuts, we would also be more radical on green taxes. We know the impact of Gordon Brown's rise to £300 this year and £400 next year of the top band of vehicle excise duty (on gas-guzzlers emitting more than 225 grams of carbon per kilometre). The Energy Saving Trust commissioned a MORI poll, and just 33 per cent of respondents said that they would change their purchase to a lower emission vehicle. By contrast, the Lib Dem proposal for £2000 (but on new cars, not penalising people who have already bought) was found to shift more than 72 per cent of purchases.

The Chancellor also missed an opportunity to reform the national aviation tax, currently a levy of £10 per passenger. If the flight is half full, the tax burden is halved even though the emissions are almost identical. Instead, the aviation duty should be based on the emissions of every flight taking off from the UK (including freight flights) thereby encouraging both full planes and a shift to more fuel efficient aircraft. And this national tax should be only a first step towards putting aviation on a level playing field with other forms of spending that emit carbon: put a kerosene tax on flights (at least within the European Union, which could be done immediately) and put aviation into the emissions trading scheme. We should also consider putting Value Added Tax on tickets.

Price changes through tax are a far better approach in this area than the sort of nanny state proposal for green air miles that the Tories appear to be toying with: what army of bureaucrats would be necessary to monitor a scheme that allowed the first return flight of the year to be tax free, but others to ratchet up? It would be return to the bad old days when banks entered any foreign currency purchases into the back of your passport, and you could only have a certain amount each year. The Tory scheme is also likely to prove counter-productive: it would take about two hours for anyone flying long haul to work out that they could avoid any shortage of Tory-sanctioned green air miles by flying to Dublin, Paris or Amsterdam before flying onwards on their long-haul flight. But then the Tories still do not understand or like foreign parts, which is the biggest single disability that they face in dealing with a global problem like climate change.

The idea that using green taxes on transport is inequitable is simply wrong. The most comprehensive study of the economic instruments used to curb carbon emissions was recently conducted by the Copenhagen National Environment Research Institute for the Nordic Council (the inter-governmental organisation) found: "The basic assumption when analysing energy taxes is that they are regressive as lower income households spend a larger share of their disposable income on energy as compared to high income groups. However, the regressive effects are often assessed as being rather moderate and are also

dependent on the type of fuel being taxed. For example, Barker and Köhler (1998) came to the conclusion that the taxation of domestic energy products is slightly regressive as compared to the taxation of transport fuels, which has a weakly progressive outcome." This very comprehensive study also came to an interesting conclusion for our own policy debate: "The conclusions drawn concerning the Swedish situation are particularly interesting when compared with the findings of an evaluation study of the environmental taxes introduced in Sweden made by the Ministry of Finance. This review of Swedish environmental taxes, including the implicit redistribution scheme, comes to contrasting conclusions in that the

regressive effects of environmental taxes - regionally as well as between households - have been largely neutralised by the specific redistribution scheme implemented in Sweden, i.e. the raising of the personal income tax allowance."

These conclusions also chime with what we know in the UK. It is simply untrue that leisure flights are largely taken by the horny handed sons of toil: in fact, the poor fly little because they cannot afford the living costs when they arrive, even if the flight is cheap. Some 86 per cent of all UK flights - and more than three quarters of leisure flights - are taken by people in the top half of the income distribution, according to Civil Aviation Authority data. Nor would a sharp rise in vehicle excise duty on new cars if they are gas-guzzlers be in the least bit regressive, for the very simple reason that they poor do not buy new cars. Indeed, 28 per cent of all households have no access to a car at all and it is not the richest quarter.

Imposing green taxes on household energy consumption would be an entirely different matter, which is why the Liberal Democrats have not gone down the route of using the price mechanism to hold back consumption. Many poor people have relatively high levels of energy use, as the recent paper for the Institute of Fiscal Studies by Paul Ekins and Simon Dresner found. Astonishingly, the bottom 10 per cent of the income distribution have energy use that varies by a multiple of six. Old ladies in big draughty homes with ancient boilers spend a small fortune: the rich buying an eco-home or at least a new house with a condensing boiler can be economical.

That is why it is so important that any climate change programme deals directly with appalling state of our housing stock. Residential housing is responsible for 27 per cent of our carbon emissions. To put that into perspective, consider the achievement of Sweden. In January, average Swedish temperatures are 7 degrees Celsius below ours, but residential housing in Sweden emits just 4.8 per cent of their carbon emissions. We could make massive savings in new homes if we built to Swedish standards: current Swedish new homes emit 65 per cent less than ours. And we need to tackle the existing housing stock because even with a substantial programme of new build, about three quarters of the homes we will be using in 2050 have already been built. The flow of new homes each year is less than 1 per cent of the total housing stock.

Any effort to improve our housing stock has to based on three key principles. The first is simply the need to improve the whole home, and not cherry pick the easy and high-return aspects like loft insulation and cavity wall insulation. Windows, doors, chimneys and floors need proper attention. The second principle is that the householder should be able to test the results of the package against serious benchmarks, so they are assured that the scheme has worked. The third principle is that energy saving packages are best funded by reversing the normal incentives of the utility companies: instead of making more profits by selling more, they should face a regulatory regime which enables them to make more money by selling less. The key is another cap and trade scheme which allocates generating certificates to each company, which would have to be bought if production exceeded its annual allocation.

Whether it is on transport, or residential housing, or the near half of UK carbon emissions covered by the reducing allocations to emit under the EU's emissions trading scheme (ETS), we need an annually updated plan to keep our carbon reductions on track in a comprehensive manner that tackles each sector of the economy. It is too easy for any one sector to argue that it is responsible for only a small part of the total - Michael O'Leary of Ryanair is a pastmaster - which is why there has to be a clear framework showing improvement for all. It is also vital that the thrust of anti-climate change policy is driven throughout government from the top downwards, and is built in to every decision. The existing energy and environment t cabinet committee needs to be beefed up and be given a clear remit on climate change in all its aspects: home working for example is a win-win both for work-life balance and cutting commuting and carbon emissions. Government has to join up the many areas that can have an impact on the problem.

The third area that needs urgent attention is energy, where a major effort at energy-saving in the home and in product design (an EU responsibility thanks to the single market) needs to be complemented with a real push for renewables. The current obligation on utilities to buy renewable energy favours on-shore wind, simply because it is the most tried and tested renewable technology. It needs to favour tidal, wave and solar more effectively if they are to be brought on stream in the quantity called for the EU summit communiqué. Moreover, there need to be some substantial projects like the Severn barrage or lagoon scheme, which on its own might generate 5 per cent of the UK's electricity needs.

The argument for subsidising renewables is not just the carbon savings but also because these are infant technologies that need support to reach their full potential. That argument does not apply to nuclear power, which would be a wrong turning. The core skill of the nuclear industry is extracting subsidies from the taxpayer, not generating electricity. No nuclear power station has been built anywhere in the world since Chernobyl and Three Mile Island without lashings of government subsidy, and such subsidies to nuclear are far from justified given the track record of over-spent budgets that the industry has left behind. The UK project with the least over-run was Sizewell B, a standard pressurised water reactor that overran by 35 per cent in real terms. Any private sector board responsible for such a disaster with an investment project would be sacked, yet every other nuclear project was even worse.

David Miliband has talked a lot about personal carbon allowances, and they may have a role as second generation policy. In theory, the poor could sell their surplus allocation the rich, thus helping the redistribution of income. However, they suffer from the same problem as using prices to change incentives with domestic fuel. If a poor householder runs out of carbon credits early in the year, because they happen to live in a home using six times as much fossil fuel as the most fuel economical in the bottom 10 per cent, the consequence is either going to be real winter hardship or a large bill paid by the Treasury in special welfare payments. Any PCA scheme also has to surmount the difficulties of being a government information technology scheme with far too much potential for big brother snooping. For the moment, we should not be distracted from what is technologically and politically possible today onto a glimmer of hope that may be stay merely a glimmer. Very similar considerations apply to the whole debate about road user pricing at a national level.

Climate change is not going to go away: we need imaginative policies that will help change our behaviour, and that involve every branch of government. This is the greatest challenge for our times, and future generations will not forgive us if we fail to tackle the fundamental malaise.