Energy: Climate Change

Baroness Noakes Excerpts

Tuesday 2nd November 2010 Lords Chamber

[Baroness Noakes]

My Lords, it is a pleasure to follow the noble Lord, Lord Smith. I must say that I disagree with much of what he said, particularly at the beginning of his speech, but we agree on the need for nuclear, if perhaps not for quite the same reasons.

I do not share the view that the consensus on climate change is the last answer on the science, particularly with regard to the causes of any global warming. I am not a scientist, but I have seen enough alternative analysis posing challenges to the prevailing view to be clear that the consensus is not an absolute one. I do not buy the inevitability of the consequences and therefore the need to act now. I have been heartened that institutions such as the Royal Society are now open to wider debate, and if the IPCC follows the recommendations of the InterAcademy Council—that is a big “if”—its next assessment should be a more balanced one.

In my contribution to today’s debate, I shall not rehearse the arguments that go to the heart of the science. Instead I should like to focus on costs of the policies that are being introduced to combat climate change and on the impact of those costs. Most of the policies that we are implementing today were developed at a time of economic plenty when many, including the previous Government, were convinced that growth and prosperity would carry on indefinitely. Today’s economic circumstances are quite different. We live in an age of budget cuts, rising government debt and expenditure cuts. Businesses are struggling to survive, and the outlook for household incomes is uncertain. There is, I submit, a legitimate debate to be had about whether the costs of action on climate change are affordable in today’s environment.

The previous Government estimated that their Climate Change Act target of reducing CO₂ emissions by 80 per cent by 2050 would cost £18.3 billion every year for the next 40 years. That is, our country will spend three-quarters of £1 trillion by 2050. To put that in context, that is roughly equivalent to the whole of the public sector debt that we inherited from Labour when we came to power earlier this year. Of course, the costs are not being picked up by the Government. We will not see them as higher taxes; rather, they are being absorbed elsewhere in the economy and will end up with consumers.

I shall take the example of feed-in tariffs. These tariffs benefit those who invest in various forms of favoured small-scale renewable energy by providing a non-market price for that energy. It is certain that these tariffs have skewed investment decisions. The mere fact that a whole industry has grown up around third-party installation, designed to milk the tariffs, is a testament to the effectiveness of the policy of encouraging investment in small-scale renewables. However, the cost of those feed-in tariffs is not borne by the energy companies—they simply pass them to energy users. I applaud the Government’s spending review for acknowledging that the tariffs will be changed from 2013 to make the scheme more affordable. I hope that the Government will take the opportunity to return those tariffs to something much closer to market pricing principles.

Of far greater economic importance are the subsidies that are paid to large-scale renewable energy. In particular, the operators of offshore wind farms are rewarded at double the rate of those of onshore wind farms through the renewables obligation certificate system. This clever system pumps subsidy into favoured forms of renewable generation, almost invisibly. The cost, though, is very real and lies hidden within the energy bills of consumers.

Another hidden cost comes from facilitating the use of renewable energy sources. The plain fact is that the wind does not blow all the time—indeed, the Department of Energy and Climate Change’s own figures show that wind turbines achieve only 26 per cent of their capacity. It is normal for our country to have extremely cold days that have no wind during the winter. That means that power from conventional power stations will have to be available, on a highly inefficient basis, to meet peak demand, regardless of how much renewable capacity is installed in the country, so the system bears the cost of capacity twice over.

As my noble friend Lord Reay has said, all of this finds its way into higher fuel bills, which have a direct impact on both businesses and domestic consumers. DECC’s own figures suggest that, by 2020, domestic energy prices could be one-third higher than they would have been without climate change policies. The picture is even worse for businesses, where the figure could be as high as 70 per cent. Businesses currently have to bear the climate change levy. In future they can look forward to the carbon reduction commitment, which the spending review has turned into another carbon tax, raising £3.5 billion over the next four years.

What will all of this do to our economic competitiveness? The UK does not have many natural cost advantages and it can do without being loaded with significant cost disadvantages. It might be okay if businesses around the world were bearing the same costs, but this is manifestly not the case. Are the developing economies adding this degree of burden to their businesses? Are the US or Russia doing so? Is even the whole of Europe so enthusiastic? Of course not. Copenhagen failed to achieve common action and I agree with my noble friend Lord Lawson that Cancun is also likely to achieve no agreement. I cannot blame any country for choosing not to burden its economy today with avoidable costs.

It is already the case that some businesses are ceasing to operate in the UK because of environmental taxes. To take one example, Britain is now a net importer of cement; it used to be a net exporter. Another example is data centres, which are high energy users. Even if they can achieve state-of-the-art energy efficiency, the carbon-related burden of high energy prices in this country, along with other levies, makes the UK an uncompetitive location. The Government are rightly emphasising the need to stimulate growth in the economy, alongside the necessary public expenditure reductions that were set out in the spending review. We will not achieve that growth if the UK is perceived as a high-cost location. We will also not achieve that growth if the regulatory ratchet is not set to reverse. Another regulatory burden comes with the CRC reporting and assurance requirements. Is the Minister aware that dealing with CRC compliance is a new growth employment sector? If that is what green jobs are, I do not think that we want them.

I turn to the impact of these policies on individuals. They will of course be hit by rising prices of goods and services, which will come as high energy costs hit producers. Individuals will also bear direct hits in their energy bills from the costs that the energy companies pick up. As I noted, these could rise by 33 per cent by 2020, and that is without any other real energy price effects in the economy. One impact may well be that domestic consumers are incentivised to use less energy, which would be a very good outcome. I agree with the noble Lord, Lord Teverson, that energy savings are desirable in their own right. However, it is unlikely that this will be enough to avoid a further increase in fuel poverty.

At present, it is estimated that around 6.6 million households in the whole of the UK are living in fuel poverty—more than a quarter of all households. The noble Lord, Lord Teverson, quoted the figure of 4.5 million households but that is for England alone. Fuel poverty increased hugely during the last decade as energy costs rose. The impact of climate change costs is regressive because energy costs form a disproportionately large portion of the income of poorer households. The money going into energy efficiency schemes for the poor was reduced in the spending review, with energy companies being told to pick up even more of these costs, for example on tariff subsidy and insulation. That may be convenient for the Government in public expenditure terms but there has to be a limit to how far energy companies can shift costs from one set of consumers to another. It seems implausible that these measures will make a significant dent in the 6.6 million fuel poor that we have in this country.

The Minister will recall that the previous Government were very fond of publishing targets with a great fanfare and then pretending that the job was done. They said that they would end fuel poverty for vulnerable groups by 2010 and completely eradicate fuel poverty by 2016. The 2010 target was missed and general fuel poverty was moving in the wrong direction. What is our new Government’s attitude to reducing fuel poverty, and by when do they think it will be eliminated?

I do not expect an instant conversion from my Front Bench on the imposition of costs in the name of climate change. However, I urge my noble friend to look again at whether wearing a climate-change hair shirt serves the real interests of our nation.