Still living in the greenhouse

Duncan Brack reviews the Liberal Democrats' policy on Climate Change

We are condemned to live in interesting times. Living in the Greenhouse, the Liberal Democrat policy paper on tackling climate change, was published and debated in autumn 1997. Now, less than thirty months after its production, perhaps about a third of all its policy proposals - including most of its main tax reforms - have been rendered out of date by a combination of the negotiation of the Kyoto Protocol the actions of industry and the policies of the Labour Government

This short article aims to reopen the debate on climate change policy within the party. It contains a brief listing of the areas in which policy is now out of date, and makes some suggestions as to possible revisions. Not every topic included in Living in the Greenhouse is covered: what we said in 1997 on agriculture, industry and commerce, overseas development, institutional and adaptation policy is still largely up to date; what we said about the evolution of the international policy regime was overtaken by events at Kyoto, but much of the thrust remains relevant. But at a minimum we need to revisit the three core sections of the paper - on the overall target for greenhouse gas reductions, on energy policy and on transport.

Targets

On the target, Lib Dem policy since at least 1990 has been to call for a 30% cut in UK carbon dioxide (CO2 ) emissions by 2010. The Kyoto target is an 8% cut in the six major greenhouse gases for the EU as a whole (most of the other gases are easier to reduce than CO2 though all are less significant) by 2008-12, and the UK Government has accepted a 12.5% reduction under the internal EU distribution agreement. The Labour manifesto commitment was a 20% reduction in CO2 emissions by 2010 a target which seems likely to be dropped (or made 'aspirational'), although we will not know for sure (if then) until DETR produces its long-awaited climate change strategy in the next few months.

The Lib Dem target was only barely credible in 1997, since it was trying to achieve the same reduction over thirteen years as we had originally planned for over twenty which is why our spokesmen increasingly talked about a trend rate of reduction of 2-2.5% per year. This is still an ambitious target, so we may as well recognise reality and argue for a 20% reduction in CO2 emissions by 2010 - whatever the Government say, they won't achieve it.

Energy

Liberal Democrat energy policy had five core components:

1. The introduction of a carbon tax, to reduce energy demand and encourage fuel switching away from carbon-intensive sources.

2. A major programme of investment in home energy conservation, routed through the supply companies and the Energy Saving Trust.

3. A reduction in VAT in energy conservation materials to the same level as for domestic energy (now 5%) and the wider use of mandatory energy efficiency standards for buildings, machinery, vehicles and appliances.

4. The promotion of renewable energy sources through higher sourcing requirements on the electricity generators.

The Government has made some progress towards items two, three and four, but they all remain, in outline if not in detail, relevant. Item one needs comprehensive rethinking, given the planned introduction, in April 2001, of the climate change levy (CCL).

The party broadly welcomed the November 1998 Marshall Report (which set out the case for the CCL), while criticising the flaws inherent in Marshall's recommendations due to the constraints placed on him by the Government. These almost entirely emanated from the exclusion of the domestic (household) sector from any impact of taxation; the CCL was to apply only to the business sector. Not only did this needlessly exclude a significant chunk of CO 2 emissions (and in a sector with many opportunities for emission reductions), it also forced Marshall to recommend policy instruments that were less effective that they needed to be: a 'downstream' tax (i.e. one imposed on the end user, rather than at the point at which the energy entered the economy - the rationale being the protection of the domestic sector from increases in electricity generation costs), and an energy rather than a carbon tax (for similar reasons).

Gordon Brown's pre-budget statement of November 1999 went some way to redressing the flaws: renewables and combined heat and power schemes are to be exempted from the CCL (moving it in the direction of a pure carbon tax, more precisely targeted on CO 2 emissions). In response to the predictable squeals from industry, he also reduced the eventual level of the CCL (though he probably never intended to implement it at the original level, thus gaining credit from industry for responding to their pleas while still introducing it at a reasonable scale - smart political footwork there), announced that all the revenues (an estimated £1bn per year) would be recycled to industry (through a 0.3% cut in employer's NICs and £150m worth of support for energy efficiency investments), and offered an 80% discount to energy-intensive sectors (steel, aluminium, etc.) which met targets for energy efficiency improvements negotiated with DETR.

The Lib Dem original proposal for an economy-wide carbon tax would have been a considerable improvement on this, but, unfortunately, we aren't starting from there. The only game in town now is the CCL, and we may as well accept it, while arguing for improvements. Fortunately, some of what we would like to achieve may now be becoming feasible from an unlikely source: industry.

Living in the Greenhouse argued (as have all Lib Dem energy policy papers) for an international emissions trading scheme, in which countries can help to meet their greenhouse gas reduction targets by buying permits from other countries which have achieved greater than necessary cuts. Since the costs of emission reductions vary hugely from country to country, this ensures that targets are met cost effectively, targeting resources on the places where emissions can be reduced most cheaply. (The US has used similar schemes, with effect, to reduce various air pollutants such as sulphur dioxide). The Kyoto Protocol includes the outline of such a scheme, and the details are currently being worked out in international negotiations.

To work most effectively, however, the buyers and sellers in the market should be the bodies which actually produce the emissions - i.e. (mostly) industry. Marshall commented that the establishment o a UK emissions trading scheme would be highly desirable (giving British firms good experience for eventual entry into the international market, and potentially opening up a new area of expertise for the City) but seemed unlikely in the short term. We agreed. We were both wrong. Spurred by the approach of the CCL, in mid 1999 about forty large firms and trade associations set up the Emissions Trading Group, devoting significant efforts to developing a workable UK emissions trading system, ideally to come into effect in April 2001, the same date as the CCL. Their interim proposals were presented to Government in October 1999, and they are now consulting with NGOs and government and developing them further.

This is a surprising and welcome development (and just shows the incentive effect of tax proposals, let alone taxes). Naturally the firms concerned want a quid pro quo for participation in any eventual scheme, and see it in tax breaks (maybe from the CCL) for participants. But in terms of reducing emissions from large firms, like those participating in the Group, emissions trading does have advantages over a tax: it leads to more cost-effective reductions and stimulates a continuing search for cuts (since the firm involved generates excess permits for sale) in a much more transparent way than does the imposition of taxation. It is also more attractive to energy intensive sectors, with genuine problems in reducing energy use (Lib Dem policy never dealt with this issue adequately) - and, more importantly, it is a far better solution than the Government's option of negotiated agreements, where all the advantages (access to information, experience in deal-making) lies with industry rather than civil servants.

So, what 1 suggest for a revised energy policy is:

• Support for a UK emissions trading scheme implemented as soon as possible, the incentive being discounts from the CCL - the total volume of permits issued by government should be in line with our revised target for C02 emissions, and progressively reduced over time. (The system should also be extended to the EU in due course.)
• Pressure on the DETR to make the negotiated agreements as effective as possible, but gradually to phase them out in favour of participation in the trading scheme.
• Implementation of the CCL for firms not opting in to the trading system (all small firms and many bigger ones not using large amounts of energy will not want to participate); and again, a commitment to steady increases in real terms over time.
• Reform of the CCL to move it further towards a carbon tax - this will inevitably cause administrative complications unless the tax can be moved upstream, in which case it will affect the domestic sector which, therefore, we should argue for.

Transport

Liberal Democrat transport policy with reference to climate change has three major planks:

1. Establishing incentives to improve fuel efficiency levels by arguing for tougher EU minimum standards, graduating VED and company car tax by the fuel efficiency of the vehicle and enforcing speed limits.

2. Reducing the overall volume of private road and air travel by a steady increase in the real price of road transport fuels, reforming the taxation of free fuel for company cars and of private non-residential (PNR; i.e. business-provided) parking, introducing road pricing in urban areas and arguing for EU and eventually global taxation of aviation fuel; and, in the long term, using planning policies to reduce the need to travel.

3. Investing in public transport, promoting 'green commuter' travel schemes and encouraging a largescale switch from road freight to rail.

The Government has made some - limited - progress on all three of these items, increasing the fuel duty escalator sharply until the next Budget (and announcing that revenue from any real-terms increase in future will go into a ringfenced fund for road improvements and public transport), graduating VED by engine size (and, for new cars from autumn 2000, by fuel efficiency), planning reforms to company car tax (no details yet), and making some moves to encourage green commuter schemes. Taxation of PNR parking and road pricing is moving forward very slowly - somewhat to the dismay of local authorities such as Edinburgh and Bristol - but look likely to feature as major sources of revenue for the new Greater London Authority. As we all know, investment in public transport has been utterly inadequate, and bedevilled by the Prime Minister's obsession with public-private financing.

Clearly the party needs to respond to these moves. Large parts of our existing policy have proved internally controversial in the past, and it is important that we get the revisions right. Some preliminary suggestions:

• We should accept the scaling down of the road fuel duty escalator. From 1994-99, UK petrol prices rose in cash prices by 44% (real increase 25%) and are now the highest in the EU (with taxes and duties accounting for almost 80% of the price). The point of increasing the fuel price is not to penalise people for driving but to encourage them to drive more efficient cars, and/or to switch to public transport. Fuel prices are not a very effective way of achieving this, since the purchases are spread out so much over the year, muting the impact (VED is better; see next point). In any case a 25% increase over five years is a pretty major signal, and one which is difficult to respond to very quickly (public transport alternatives have not improved sufficiently over the same period, and vehicle design, manufacturing and purchasing behaviour takes longer to change). Finally, the long fall in oil prices up to the end of 1998, which partly cushioned the tax rises, has now emphatically ended, with the crude oil price climbing from about $9 a barrel in December 1998 to $25 a barrel in December 1999. Our future aim for road fuel duty should be to see it increase it at a minimum by more than inflation, and to link increases to improvements in the average fuel efficiency of the UK car fleet (i.e. the better the improvement the lower the rise).
• We should use other tax changes more aggressively, however, to establish incentives for greater fuel efficiency. This means, first, graduating VED much more steeply by engine size and fuel efficiency (plenty of other countries do) - since once- or twice-yearly payments have a much bigger psychological impact than relatively small fuel purchases. Second, company car tax (Including the taxation of free fuel) should be similarly reformed - this is a major area of action since about half the new cars in the UK are bought by fleet buyers. It might be sensible for our parliamentary spokesmen to produce some indicative figures on these proposals for the party's alternative budget in March.
• Most of our remaining policies are still entirely relevant, but need to be emphasised more strongly. Powers for road pricing and taxation of PNR parking should be extended to all local authorities. Green commuting schemes should benefit from bigger tax breaks. Above all, we should announce a major programme of investment in public transport: rail, buses, trams and light rail. Revenue can be derived from all of the tax changes (none of which need to be revenue-neutral) set out above - and also from innovative financing schemes such as the issue of bonds for the London Underground currently being promoted by our London Mayoral candidate, Susan Kramer. This is a key area in need of policy development, both for this year's elections and the general election.