Energy Bill

Lord Stern of Brentford Excerpts

Tuesday 18th June 2013 Lords Chamber

[Lord Stern of Brentford]

My Lords, I refer to my interests in the register, in particular my chairmanship of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, which is part of my role as professor of economics at the LSE. I am perhaps one of the few unretired professors of economics in your Lordships’ House, if not the only one.

I will not dwell on the science—after all, I am an economist. This House has often heard on this issue from two former presidents of the Royal Society, the noble Lords, Lord May and Lord Rees. Noble Lords can also consult the current president of the Royal Society, Sir Paul Nurse, and Sir Brian Hoskins of Imperial College, who leads for the Royal Society on climate change. If any noble Lords have new results that can overturn 200 years of research, dating from the great French mathematician and physicist Joseph Fourier in the 1820s, and can contradict the 98% of peer-reviewed papers that identify anthropomorphic climate change, they should immediately publish them in one of the learned journals.

If you want to learn more, consult the Royal Society, the US National Academy of Sciences or the French, Australian or Chinese academies—whichever you choose to turn to. It is surely to the learned societies, scientific societies and the journals that we should go for serious science. Taking the long-term view, the world is warming and the only plausible explanation is human activity. We cannot predict the outcomes with certainty; this is about risk management, but it is surely clear that we are embarked on a reckless and potentially irreversible experiment with the only planet we have.

The risks are more severe and will come earlier to the poorest among us, but we all face them, whichever country we live in and however well-off we are. Contrary to what the noble Lord, Lord Lawson, has just claimed, the broad estimates of climate sensitivity are fairly stable. If he wants a discussion about those estimates, I again refer him to those who know about these issues and study them professionally. I have discussed them intensively with Professor Myles Allen, of Oxford University, who has already been referred to, with Sir Brian Hoskins, whom I mentioned and leads on climate for the Royal Society, or with Julia Slingo, the chief scientist at the Met Office. We are all confident that the IPPC report, looking across the whole waterfront of the evidence and reporting this autumn, will say exactly that—the estimates of climate sensitivity are broadly stable.

Let me turn to where other countries are going. It is all too easy to say that we are small—accounting for perhaps 2% of global emissions—and to claim that other countries are doing little. That is not correct. I have worked on China as a professional economist and as chief economist to the World Bank for more than 25 years, including intense discussion over the recent 12th five-year plan. China is midway through that plan, which contains strong emissions reduction programmes. Its carbon intensity reduction target to 2020, relative to 2005, is 45%—considerably more ambitious than our own 30%. China is ranked third on the Climate Institute’s low-carbon index. China plans to peak coal use during this plan period—that is, within three years—and is considering peaking annual emissions by 2025.

Why is China doing this? I certainly agree with the noble Lord, Lord Lawson, that it is not because it studied the United Kingdom with great precision. It is doing it because it understands the grave risks of climate change and because it realises that there is a green race, which it intends to win, or at least compete in very strongly. That is the kind of race that we should seek. The US is now reducing emissions rapidly and energy-related CO2 emissions are back to the levels of the mid-1990s—achieved by a combination of substituting gas for coal and regulatory standards. They could meet their 17% 2005 to 2020 reduction targets without national legislation. Brazil is targeting 40% reductions for 2005 to 2020. I could go on. Those are three very big and important countries.

The world is doing too little, but it is absolutely not true that other countries are doing nothing. The more we recognise, country by country, what others are doing, the sooner the much needed acceleration of action will come. The global race is becoming a green one, and those who attempt to stay dirty will find other, cleaner countries understandably placing restrictions or tariffs on their imports. They will be WTO-compliant, because they will counter a subsidy on dirty. In this international context, UK climate change legislation is wise and forward-looking, not only from the perspective of climate change, fundamentally, but from the point of view of future growth. So, too, is this Bill wise and forward-looking.

What about costs to consumers? Energy bills have increased by around £400 for the typical household since 2004, from £600 to roughly £1,000. Of this increase, 80% was unrelated to carbon policies and was due largely to the increased price of gas, together with some increase due to investment in networks. Much of the remaining 20% was associated with investment in energy efficiency, which will bring its returns. In future, low-carbon policies aimed at supporting investment in clean power generation technologies will add £100 to the energy bill per annum of the typical household by 2020—around a 10% increase. There are opportunities to more than off-set this through energy efficiency improvements, particularly through more efficient boilers and appliances. The low-carbon policies are more likely to bring a reduction in bills by 2020 than increases. Over the past decade, the reliance on hydrocarbons has forced up prices.

Gas has a real contribution to make to emissions reductions in substituting for coal, but the benefits of shale gas in the UK are more likely to be in the energy security and profits that it could bring than in the price impact. Prices in the UK will be largely determined by Europe and world markets. Gas could indeed play a useful role in meeting ongoing demand for heat, balancing generation on the power system and gas generation of electricity with CCS if this is shown to be viable. It can be a valuable bridge to the medium and long term but, without CCS, gas cannot be the long term.

The future is uncertain, as many have remarked, and we will have to learn and be flexible. We will need a range of technologies and a smarter, more flexible and better interconnected grid. This will include improved energy storage, more interconnection with other European electricity networks and, crucially, better demand management. Additional R&D in all these areas will be essential to ensure that a full portfolio of options is available in the coming decades to manage the uncertainties and opportunities that are likely to emerge. Energy efficiency must, of course, be at the heart of all we do.

In thinking about investment, let us recognise that government-induced policy risk is the greatest threat to investment around the world, wherever you look, be it through threats of nationalisation, corruption, the speed of the law courts or whatever. That is a lesson that I have learnt in a lifetime as an economist specialising in development and growth, but also in a decade that I spent directly involved in supporting and financing investment, particularly infrastructure investment, first as chief economist of the EBRD and then of the World Bank. For the UK, clarity of policy is paramount to deliver the investment needed to decarbonise the power sector. The opportunity to leverage private sector investment now is potentially huge, with low interest rates, liquidity in much of the private sector strong and investors waiting for real clarity. It is the noises off and the apparent vacillation—the idea of constantly reviewing policy—that has undermined confidence. There is now a need for clarity in the wake of past confusion, and I warmly welcome the Bill as making a major contribution to reducing that confusion and giving a clear sense of direction.

We need substantially more strengthening of the necessary confidence. In particular, we need a stronger institutional structure to bring confidence to the investment framework. For example, the LSE Growth Commission, which reported in January and of which I was a member together with the noble Lord, Lord Browne, and others—I apologise for referring to the LSE again—recently proposed a new institutional architecture for infrastructure, including an infrastructure strategy board that could radically reduce medium-term policy instability. The energy and transport sectors are around 70% of this infrastructure story.

[Lord Vinson]

My Lords, the noble Lord, Lord Stern of Brentford, has failed to mention the cost of energy to British industry. Is that not a vital and essential part of maintaining jobs and our competitiveness, and helping us correct the huge export-import imbalance that we have at the moment? He has not mentioned anywhere the cost to industry. Is that not a fact that should come into his and his department’s calculations?

[Lord Stern of Brentford]

I do not have a department. I am chair of a research institute and an academic.

The cost of energy to industry is indeed an important factor in its competitiveness, but it is not nearly as important as the investment climate, wage rates, productivity and exchange rates. This is of fundamental importance. Primary energy in the UK and similar economies is about 5% of GDP. Even a 20% increase would give you a one-off 1% increase in costs. That does not move industry from one place to another. You can study some of the publications on our website. If you look at what determines where people are, the data are made up of those issues that I have described: investment climate, wage rates, productivity and exchange rates. This is an important part of the story, but a small one relative to other big factors. Furthermore and fundamentally, I have given reasons why over the medium term the policies that we have been describing here are just as likely to force prices down over 15 or 20 years as to raise them, if not more likely to do so.

A target for power sector decarbonisation that gives a crystal-clear signal to investors is essential. Without such a target and with potentially mixed messages from government, there remains a high degree of uncertainty that will deter investors. The best way to address this government-induced uncertainty is to include in the Energy Bill a target for power-sector decarbonisation, specifically a target to reduce the carbon intensity of power generation to 50 grams of CO₂ per kilowatt hour by 2030, as recommended by the Committee on Climate Change as being necessary to meet overall emissions reduction targets. I urge your Lordships to support the Bill. It is a wise and sensible step in a good direction. It would be much stronger and wiser with a decarbonisation target.

In summary, there are five reasons for this target. It is the responsible way to play our part in a world at immense risk from climate change. It is necessary to reach the target for emissions reduction that we have sensibly set for ourselves. It is necessary for the credibility and clarity to foster the confidence necessary for the investment on the scale that we need. It will allow us to move still more rapidly into the world markets of the future. Finally, as that investment takes place, we will find that it plays a key role in fostering the investment and infrastructure that will deliver the energy security, affordable energy and growth that this country sorely needs.