Climate Change

My Lords, I declare my interests. I am managing partner and managing director of Riverstone Holdings. This manages several energy-focused private investment funds, which hold stakes in two UK companies. I am also chairman of the Accenture Global Energy Board, a member of the advisory board of Sustainable Forestry Management Limited and a member of the climate change advisory board of Deutsche Bank. The time for talking about climate change is over; it is time to get things done. I should like to make four points. First, climate change cannot, and should not, be tackled in isolation. It must be placed at the heart of society, integrated with other priorities. Secondly, we have in front of us an opportunity to create a 21st-century green industry in the UK. We should seize the moment. Thirdly, the UK’s energy policy needs to be retooled to deliver new, more diversified infrastructure; and, fourthly, we must strengthen international institutions so as to ensure that developing countries are tied into global climate change efforts. The IPCC’s fourth assessment report provides us with a clear call to action: we must halve global emissions compared with current levels by 2050. The Committee on Climate Change recommends that the UK’s contribution to this goal should be an 80 per cent reduction in the same period, a target now enshrined in the Government’s pioneering Climate Change Act. I believe that both goals are appropriate and achievable. A great deal of economic analysis and policy thinking has been done, and there is a remarkable consensus on what it takes to get there: taking energy out of global GDP by revolutionising energy efficiency; taking carbon out of energy by transforming the energy mix in favour of renewable and nuclear energy and by deploying carbon capture and storage; preserving carbon sinks through improved forest and land management; and helping vulnerable people to adapt to climate change. We also know, in theory, the policies necessary to achieve those ends in the long run, the most important being pricing carbon, incentivising technology R&D and deployment, and removing barriers, such as the widespread subsidisation of fossil fuels. When it comes to implementation, however, our track record is decidedly patchy. The Kyoto Protocol has created a global market for carbon. Many parts of the world have adopted climate change targets, the most ambitious being the EU’s 20/20/20 package. National mandates and incentives have stimulated significant investment in alternative energy. Pioneering work has been done by scientists and engineers, many of them based in the UK. New low-carbon technologies have been created, and the costs of proven technologies have fallen. The business community has also stepped up, signalling its willingness to take action in a flurry of initiatives. Yet, despite all this activity, global emissions have grown faster than even the worst-case scenario projected by the IPCC in 2000. Here in the UK, we will almost certainly miss our original ambition of reducing emissions by 20 per cent by 2010 compared with 1990 levels, and we have made slow progress in scaling up renewables. Halving global emissions by 2050 will require what has been described as ““an industrial revolution in a third of the time””. It is clear from every analysis that I have read that the greatest obstacles to getting there are not scientific or technological, nor are they related to macroeconomic cost; the greatest challenges are political. My first point is that climate change cannot, and should not, be compartmentalised or pushed into the long grass. It is essential that climate change efforts are integrated with other social priorities—that environmental integrity is made a tangible part of economic prosperity and national security, at the centre of society. That means that all levels of government and all government departments need to be involved in the solution. It means making a much more determined appeal to hearts as well as minds. Environmental integrity is not an option or a luxury; it is fundamental for society to flourish. There are trade-offs between climate change and other priorities, which are felt particularly keenly by some interest groups. An example is the auctioning of carbon permits which are essential in imposing a meaningful carbon price under the EU ETS. Auctioning will impose additional costs on fossil-fuel-intensive industries and their customers. Yet I am convinced that these costs will be manageable. This is not the first time in my career that a proposed policy change has prompted fears about competitiveness. As long as all players in the industrial sector are eventually treated equally, such concerns nearly always turn out to be exaggerated. There are also other trade-offs, such as whether to build new coal-fired power plants which would enhance energy security but harm the environment. There are also many areas of activity where economic prosperity, national security and environmental integrity come together. Building green energy infrastructure and improving energy efficiency are two examples. This is now being recognised in the United States where President Obama has promised to double clean energy capacity as part of his plan to stimulate the economy. A similar approach is called for by other Governments. This is my second point. Here in the UK a green revolution in our offshore waters is a prize waiting to be seized. As the Government have affirmed, this is an area of activity where this country could differentiate itself by building on our world-class wind, wave and tidal resources and our expertise in marine engineering. New wind turbine plants, transmission lines, installation vessels and substations would create thousands of jobs that might otherwise find their way elsewhere. Enhanced clean-energy infrastructure, coupled with widespread deployment of smart meters and smart grids, would bolster energy efficiency. Current policies are not creating enough bite. To those who say that it is not the job of government to kick-start the industries, I say that it has been done before with great success. The UK’s offshore oil and gas industry was created from virtually nothing during the 1970s and 1980s. I remember how, in the early days, companies such as BP had to rely on hourly workers from America because the UK did not have enough qualified technicians. Now around 300,000 people resident in this country are employed in the oil and gas industry. High oil prices provided a strong market pull, but Governments gave industry a helping hand, creating generous tax incentives and a supportive, regulatory environment in helping to build strategic infrastructure. There is even more cause for government intervention today because energy security and climate change mitigation are public goods. They would not otherwise be recognised by the free market. The alternative would be to leave new technologies to the vagaries of fossil-fuel derived power prices before they can stand on their own two feet. That leads to my third point. We must fundamentally rethink the objective of energy policy in this country. As the Oxford economist, Dieter Helm argued in a recent report, competition—the guiding star of UK energy policy since the 1980s—worked well while there was a surplus of energy infrastructure capacity. But price competition will not deliver the new, more diversified infrastructure that we urgently need to bolster energy security and reduce carbon-dioxide emissions. I remain convinced that the market is the most effective delivery unit available to society, but it will need a new strategic direction and a new framework of rules laid down by government. That starts with gaining a better understanding of how investment decisions in energy are made. The up-front capital outlay of a typical project is paid back over 20 or 30 years. That means that policies must possess above all else long-term certainty and stability. Policies must be clear, transparent and accessible to all players, not just specialists. A good example is offshore wind. By insisting on a decentralised competition-based model, the proposed regime for offshore transmission licences risks falling short of the certainty, stability and clarity needed. A simpler, more strategic approach, such as the one adopted by Germany, should be considered as an alternative, at least for round 3 projects, with deliverability at the forefront of policymakers’ minds. Government must also recognise that the combination of high capital costs, falling power prices and scarcer, more expensive debt finance is leading to inadequate returns. There is a real risk that offshore wind farms will be cancelled. One way to help mitigate that risk would be for state-controlled banks to provide loan guarantees for green infrastructure projects, an approach similar to the loan scheme for small businesses recently announced by the Government. All this will come at a cost, although the net impact on consumers is likely to be significantly less than the impact of the rise in fossil fuel prices that occurred between 2004 and 2007, and the costs could be mitigated by improving energy efficiency. Harnessing the very large potential to improve energy efficiency in the residential and transportation sectors is proving difficult, even though many of these savings would be at low or negative cost. New financing mechanisms, developed in partnership with energy companies, will be needed to unlock these savings, in tandem with targeted regulations and public education programmes to change consumer behaviour. My fourth and final point is that the single greatest challenge we face is how to engage developing countries in a global climate-change agreement. It is estimated that the sum of national policies in the developed world is unlikely to achieve more than a third of the required emissions reductions by 2020. Developing countries represent the single biggest source of emissions growth, and they contain by far the most material opportunities to reduce emissions: two-thirds of the global potential, deliverable with half the capital expenditure. Yet on every measure of equity, it is unfair to expect developing countries to shoulder the same amount of effort as developed countries from the start. I believe the solution is twofold. First, developing countries must do what they can, focusing on areas, such as energy efficiency, that also enhance their economic prosperity and national security. Secondly, and in parallel, policymakers must harness the power of the market, putting in place strengthened international carbon-finance mechanisms. This was the central conclusion of yesterday's announcement by the European Union on EU climate change priorities. The CDM, with its project focus, has proved inadequate and difficult to scale up. It should be expanded, made less bureaucratic and significantly enhanced with carbon-finance mechanisms that apply across entire industrial sectors. One of the key recommendations of the Government's Eliasch review is the need for a new financial framework for preventing deforestation and encouraging good land management. These activities alone could contribute half the necessary reduction in global emissions by 2020. Additional funds will also be needed to encourage the transfer of low-carbon technologies internationally, to build administrative and human capital and to pay for adaptation efforts. Last year, rich nations spent more than $100 billion on overseas development assistance. A recent analysis suggests that flows of carbon-related finance to the developing world will, in time, need to be of a similar magnitude. This is a hugely ambitious and will be impossible without dramatically strengthened international governance. The answer is not to tear up existing institutions, such as the UNFCCC, and start from scratch. The evolution of GATT into the WTO suggests that, with the right support, institutions can widen and strengthen significantly over time. However, I believe that a new body, an international carbon fund, will be needed to act as a global central bank for carbon and to manage the exchange of multiple environmental ““currencies”” as national, regional and international schemes become linked together. All that will require a great deal of diplomacy, and the UK will have a critical part to play. This country possesses a good deal of influence on energy and climate matters in the EU, which has spoken with a single and determined voice in recent negotiations. Our relationship with the United States could be pivotal as Barack Obama’s inauguration heralds a new era of US management. We hold close friendships with many of the most important developing countries. Several of those countries are in the G20, whose members are collectively responsible for 85 per cent of global emissions. With strong political leadership, the G20 could unlock a new global climate change agreement in Copenhagen this year. So we have a vision for the future, and the work on policy design is complete. Now we must begin the hard work of implementation. My advice to policymakers is simple: place climate change efforts at the heart of society; embrace the opportunity to build a new low-carbon industry; retool energy policy to deliver the new diversified infrastructure we need; and focus as much, if not more effort externally on forging a global agreement underwritten by stronger institutions. With that, I beg to move for Papers.