Steps towards a low-carbon future

May 26th, 2011 by Vince Cable

Below are excerpts of a speech, “Steps towards a low-carbon future” given by Vince Cable, UK Secretary of State for Business, Innovation and Skills, in Liverpool on 26 May 2011.

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The challenge of creating a low-carbon future is a pressing one, yet the thinking and analysis behind it are not new.

I have never been persuaded by the pessimistic Malthusian view of resource constraints, which technological innovation has repeatedly confounded – especially in agriculture – as has the flexibility of markets.

It was, in fact, a variant on the Malthusian question that inspired the Brundtland Report, which I helped to write for the United Nations in 1986 and 1987.

It launched the idea of sustainable development, and said that “choosing an energy strategy inevitably means choosing an environmental strategy.”

Brundtland also gave prominence to a worry that was, at the time, relatively obscure.

Scientists were developing an early consensus around global warming, and the report talked of the serious probability of climate change generated by the ‘greenhouse effect’ of gases emitted to the atmosphere, the most important of which is carbon dioxide (CO2) produced from the combustion of fossil fuels.

Not long after, and arising from that search for scientific consensus, I was involved in preparing a report to Commonwealth Prime Ministers on climate change and sea level rises. It helped to convince them that global warming was a serious problem – and also that developing countries, in particular, needed to mobilise against the potential threat to agriculture and coastal infrastructure.

From there I went to Shell, where – already, in the late 1980s – a major oil company was trying to come to terms with a low-carbon future, long before governments and even environmental NGOs were fully aware of the issues.

Moreover, it is a curious error of some in the green movement to think that environmental matters are somehow anathema to basic “orthodox” economics. This could not be further from the truth. In many ways they are some of the oldest problems in economics:

  • How can scarce resources best be allocated?
  • What are the best methods for dealing with the spillover costs of pollution?
  • How do you enforce cooperation between different people in a contract?
  • And how do you deal with uncertain probabilities of catastrophic events – a topic that financial regulators may also have done well to consider?

It is not the discovery of exotic new theories that is needed, but the relearning of some old, albeit difficult, lessons.

Today, some twenty years after the problems were first discussed, the contours of the solutions are clearer. I’ll suggest three.

First, international agreement.

None of us can solve these problems by acting alone. Environmentalism in one country runs into the problem of creating an unlevel playing field for producers. Environmental threats are classic coordination problems. The social costs outweigh the private costs. Recent summits in Copenhagen and Cancun are an attempt to get the world to realise these social costs and act as one.

Second, people respond to incentives and prices.

High energy prices are a very effective – if sometimes painful – mechanism for ensuring an industrial transformation. In the 1970s they signalled the end of the gas guzzler, which meant retooling car factories everywhere, and a structural shift from oil-fired electricity.

The idea of a tax on carbon is a rational response to carbon pollution. My party was already modelling carbon tax ideas under Paddy Ashdown. This government has launched a carbon price floor – a carbon tax in all but name – though the debate around it raises important questions about who pays.

A managed industrial transformation is my third priority in decarbonising our economy – and this should be seen as an opportunity. Yes, we face a huge investment challenge, and that can mean economic costs. But, as Lord Stern has reminded us, it also means learning, innovation, the potential for greater energy security and cost savings through better energy efficiency. Besides, any calculation must include the serious costs to the environment that come from continuing to emit.

So how do these ideas translate into policy?

We must push hard at an international level. Britain played a leading role at the Cancun Climate Conference, which restored momentum to the global low carbon agenda after the disappointment of Copenhagen.

A key element of our international agreements is to support ambitious carbon budgets at global, EU and national levels – and, by demonstrating UK leadership, to encourage them to move in sync as much as possible.

Commercial confidence is also vital. When company boards make decisions that depend on an investment return over 20 or 30 years, any increase in uncertainty will greatly undermine confidence. In the past, capricious and politically-driven changes in the tax and regulatory climate have increased the cost of capital unnecessarily.

One means to greater certainty is a commitment to better regulation. The Principles of Economic Regulation, on which we consulted earlier this year, should force government departments into stable, accountable behaviour, so they don’t use regulators as a way of scoring cheap political points.

Creating more certainty in the financial climate is also crucial to getting the investment we need. On 24 May 2011, I announced in the UK Parliament the next steps for the Green Investment Bank, which will play a big part in providing certainty and impetus to low-carbon investment. By promising legislation and strong independent governance, we are laying the foundations for a strong, durable institution.

And this summer we will publish our White Paper on electricity market reform. We will seek to improve the relative attractiveness of the UK for investors in the electricity market by creating a long-term, stable and predictable energy market arrangement – allowing us to meet our targets for electricity decarbonisation, ensure security of supply and keep energy bills affordable.

On pricing, while the price of using carbon will have to rise if the quantity used is to fall, the transition has to be managed carefully. Forcing industry and consumers to take a higher renewable portion in their electricity mix is similar to a tax on electricity that is diverted to particular generators. Either consumers or taxpayers need to bear these costs. We need to be honest and transparent about this.

There could be no greater error than denying the reality of hard tradeoffs. I am as positive as anyone in promoting green jobs. There are more than 900,000 people employed in what can loosely be called the green economy and its supply chain – across environmental, renewable energy and low-carbon sectors. But there are opportunity costs, and some of these jobs may have been achieved at the expense of others in non-green areas.

It was a 19th century French economist Frederic Bastiat, who first framed the so-called Parable of the Broken Window. In brief, smashing shopkeepers’ windows may be good for glaziers and the glass industry supply chain, but not for shopkeepers. The parable is instructive but perhaps misleading. Arguably the windows are already broken because of environmental damage.

With this in mind we have to think carefully about how costs fall. While the overall costs of the transition may be manageable, we have a complex open economy with a highly variable exposure to energy costs. The combination of highly energy intensive processes and a globally traded product can mean a change in the electricity price rendering some production in the UK unprofitable.

A recent snapshot of forward wholesale power prices finds the UK’s almost ten percent higher than France, Germany and the Netherlands. Industry is right to be concerned, and government will have to act to mitigate any extra costs that fall on the companies most exposed.

By the end of this year there should be a solid package of measures to prevent carbon leakage and allow our energy intensive industries – which are already highly energy efficient – to remain internationally competitive. We are currently considering a range of options to make sure that the costs of decarbonising our electricity generation do not fall too heavily on energy intensive plants – like Ineos, which I visited earlier today. Strikingly, Ineos’s Runcorn plant uses as much electricity as the city of Liverpool.

These measures are not only about protecting valuable jobs in sometimes deprived parts of the country, but about making our policies on climate change more effective.

I totally disagree with the claim that the interests of our manufacturing industries are at odds with caring about climate change. As the Prime Minister himself has said, “It does not help climate change if you simply drive an energy intensive industry to locate itself in Poland rather than in Britain”.

A related point is that growth industries like wind and solar will often rely upon energy intensive inputs, and we should be planning to boost them as part of our supply chain.

An example. Since 1979 – when I last worked in the DTI, as it then was – the amount of steel the UK has needed each year for industrial purposes has averaged around 19 million tonnes. In 1979 we produced 12.6 million tonnes ourselves. Today, the figure is 4.8 million tonnes, with the rest imported raw or embedded in products.

Given the huge likely demand from new industries like wind power, and the extraordinary skills still present in places like Sheffield and Teesside, we should be planning for expansion. Not only in steel, but in composites and biofuels – a vast potential supply chain. Earlier today at Ineos in Runcorn, for example, I learned about some really promising biofuel technologies.

Reconstruction represents a rare opportunity. There aren’t that many times when a fully developed economy like the UK can predict the shape of such a prolonged industrial transformation. Regardless of the sometimes theological arguments about whether low-carbon investment is a cost or an opportunity, we face a giant challenge, just like the post-war governments who rebuilt housing stock and the road network.

This period of reconstruction is one reason why some are calling for a renaissance in industrial policy. In many ways, low-carbon energy is a classic infant industry, just likes cars, aeroplanes and computers were after the Second World War. According to the Carbon Trust, the global offshore wind market will grow by 10 per cent a year over the next 40 years to be worth up to £170 billion per annum by 2050.

Another potentially very big industry is carbon capture and storage. If, by 2050, we’re to cut emissions by 80 per cent, there will have to be a solution that makes coal- and gas-fired stations carbon efficient. The International Energy Agency estimates that 3,400 plants will need this technology. We have signalled Britain’s commitment to this by carving out £1 billion for the first carbon capture and storage demonstration project, with three more to come.

However, despite an urgent need for the government to think long term, I reject calls for us to return to the era of picking winners. We have to be technology neutral, and keep open the option that low-carbon energy may, in due course, come from currently unfeasible or high-cost sources. There needs to be a more nuanced understanding of industrial policy.

The transformation will also have to be fuelled by private sector ideas, and private sector finance. Our role is to make sure that government decisions, which permeate every part of the low-carbon environment – as regulator, as purchaser, as the provider of skills and infrastructure – help rather than hinder.

I have already talked about the Green Investment Bank, which will address structural gaps in finance. Other market failures exist within technological innovation, where the ideas are still at an early stage, and where there are compelling reasons to encourage the sharing of ideas and essential equipment to bring them forward. That’s why we fought hard during a difficult spending round to secure the science budget, and to enhance the role of the Technology Strategy Board – the main prime channel through which we will incentivise business-led technology innovation.

We also secured funding worth over £200 million to establish an elite network of Technology and Innovation Centres – and today, I am pleased to announce a new Technology and Innovation Centre focused on offshore renewable energy.

Offshore renewables are essential for meeting our energy targets. We need to reduce costs as much as possible for the sake of consumers – and we need to harness technological innovation in the UK to boost our economy.

The centre will concentrate on technologies for offshore wind, wave and tidal power: both on transferring knowledge from the established offshore engineering industry and on the development of marine and tidal systems, turbines and blades – where our expertise in aerospace and control systems represent distinct advantages.

Once established, the centre – made up of people from both industry and academia – will also provide a one-stop-shop for R&D and seek to make the UK a prime location for offshore renewable energy technology innovation and deployment.

Far from impinging upon the private sector, this is the sort of intervention that provides the space and support to allow private sector ingenuity to grow. We have already announced a High Value Manufacturing Centre – incorporating facilities in Sheffield, Bristol, Coventry and Wilton, among others – and a Cell Therapy centre.

These centres epitomise the open, collaborative and affordable industrial policy that I believe in.

Today also marks publication of the Technology Strategy Board’s implementation plan for the Technology and Innovation Centres. It includes a shortlist of technology areas from which the next three TICs will be chosen – the starting point for more detailed discussions with the business and academic communities to assess their respective potential contributions and establish their appropriate focus. Some ideas – smart grids and distribution, for example – could have an important role in helping UK industry develop and commercialise technologies to reduce carbon emissions.

I can further announce today that we are making new investments in two clean technology funds.

Through the UK Innovation Investment Fund we will be committing over £20 million to Zouk Cleantech 2 and HG Capital Renewable Power Partners 2.

Government investment of £150 million in this fund has secured £175 million from the private sector – making it one of the largest technology fund of funds in Europe. The UKIIF then backs specialist venture capital funds that invest in SMEs, start-ups and spin-outs in low carbon, digital, life sciences and advanced manufacturing.

So, this latest investment will flow via the two clean technology funds into innovative, growing companies working on alternative energy generation, renewable energy infrastructure, helping businesses and people become more energy efficient, and water treatment and conservation.

The Coalition set out to be the greenest government ever. Let me finish by saying that this isn’t just rhetoric. Despite having to deal with the most difficult fiscal inheritance since the War, we have delivered an enormous amount already:

  • a Green Investment Bank
  • the Green Deal, to upgrade our housing stock
  • one billion pounds for carbon capture and storage
  • a strong commitment in law to world-leading carbon reduction
  • significant support for low-carbon vehicles and offshore wind
  • and now additional investment in emerging technologies and businesses.

Transforming the UK into a low carbon economy is a major industrial challenge. It’s one that I’m both optimistic and realistic about. Optimistic, because I know that we have faced and overcome similar challenges before – remember the problem of acid rain, and the depletion of the ozone layer? Realistic, because I feel strongly that the genuine dilemmas we face must be confronted, not evaded.

My Department and UK Trade & Investment are at the centre of this. Not because business demands that environmental problems should be diluted – but because it is only through the combination of government leadership, overseas networking and business ingenuity that we can meet – and overcome – this challenge.

 

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