Speech by Rt Hon David Miliband MP: the Dr S T Lee Lecture on Public Policy at the University of Cambridge, "The transition economy: a future beyond oil?" Cambridge, 5 March 2007
I am delighted to be able to give the Dr Seng Tee Lee lecture on public policy. I understand that the purpose of these lectures is to look at the relationship between science, technology and public policy. Nowhere is that relationship more important than in addressing the issue of global warming, and that will be my focus today.
In the 19th century, Britain pioneered the transition to an industrial economy. The industrial revolution brought together invention and science, a culture of enterprise, and political leadership from our great cities and national government.
In the 21st century, we are again a transition economy. We need the same combination if we to make a new transition: from a high carbon to low-carbon society. We need to transform the productivity with which we use natural resources in the same way as mechanisation and mass production transformed the productivity of human resources. We need markets that factor in the cost of greenhouse gases. We need political leadership at a local, national and European level prepared to make bold, long term, decisions.
Next week, I will announce the details of our Climate Change Bill. We will become the world’s first country to establish in law our goal and timetable for becoming a low-carbon economy. Today, I want to begin to move the debate from whether we should act, and what targets we should set, to how we will achieve them.
The scientists say that we have 10 to 15 years for global carbon emissions to peak. The economists say that over the same period North Sea oil production is due to decline significantly. The international relations experts say that a world less dependent on oil would be good for global stability. So my starting point is the twin challenges of climate change and energy security: an economy no longer dependent on oil would be good for both. I then want to address the technologies required in each of the three key sectors that produce C02 - electricity, heat and transport - and the policies required to drive the transition that we need to make, for our own sakes, and as part of the wider battle against global warming.
The challenge
The challenges facing this country are changing. In 1997, macroeconomic instability and public service under-investment were the primary concerns. There are enduring economic and social challenges but the overall story is of progress and improvement. Today, our domestic challenges are increasingly linked to global change; our current and future welfare is dependent on actions beyond our immediate sphere of influence. This is most obviously true in the challenge of energy security and climate change.
As the Energy Review set out, rapid industrialisation by China and India will mean that global energy consumption is expected to double by 2030. At the same time, many of our coal and nuclear power stations are coming to an end. For years, the UK has been self-sufficient in gas and oil, thanks to North Sea Oil production. In future, we will increasingly depend on oil and gas imports from Russia, Central Asia, the Middle East and Africa. We could be importing as much as 90% of our gas by 2020 compared with around 10% now. So there are plainly dangers of energy insecurity.
But the greatest risk we face is climate change. A consensus has now emerged on the science:
- It is clear that the global temperature has risen 0.7 degrees in the last century, almost certainly unprecedented in human civilization, and by 0.4 degrees since the 1970s.
- It is clear too that this is a result of human activity. We have massively increased the burning of fossil fuels that emit greenhouse gases. We have continued to cut down the forests that absorb carbon dioxide. As a result, C02 levels are now 35 per cent higher than before the industrial revolution.
- It is clear finally that if we carry on with business as usual, with more countries growing in wealth and population, the stock of greenhouse gases in the atmosphere will increase dramatically, with catastrophic consequences.
Al Gore says climate change is a planetary emergency. It is. But it is more than that. It is a humanitarian emergency – a threat to the security and survival of people, not just nature. One of the reasons why the world has been slow to wake up to the threat from climate change is that is has been bracketed as an environmental issue. In Government, climate change is increasingly being re-framed. It is moving out of the box market ‘environment’.
Climate change is becoming a security and humanitarian issue. In Europe in 2003, 30 000 people died from the heatwave. In our lifetimes, unless we act, 80 million people face the risk of flooding from rising sea levels. Up to 600 million people face the risk of famine.
For obvious reasons, therefore, climate change is becoming a development issue. Those people at risk of famine are, by cruel irony, not those who have caused the problem; they are the lowest carbon emitters in the poorest countries. Unless we help Africa adapt to the climate change already in train, our aid and development policies will be undermined. Unless we help the developing world move straight to low-carbon development, their growth will exacerbate the problem we started. Climate change is also becoming a financial and economic issue. While the science of climate change is largely accepted, people often ask ‘can we really afford to invest in energy efficiency and low-carbon energy.’ The Stern report showed we cannot afford not to. The cost of mitigation seems to be far less than the cost of business as usual.
3D Energy
So energy and environment policy demand a new approach. It is not inevitable that they pull in the same direction. For instance, during the second world war, Germany produced synthetic petroleum from its coal reserves – a process that South Africa adopted when facing trade sanctions during Apartheid, and which involves large increases in energy use and carbon emissions.
However, energy security and climate change can lead to common solutions. Over the next half century, we are likely to see three transformations in our energy system, what could be termed a 3-D energy revolution.
• First, demand reduction - radically reducing our energy needs through much greater energy efficiency
• Second, decarbonisation - switching to low or zero-carbon energy sources, from carbon capture and storage to wind, wave, solar and nuclear power.
• Third, decentralisation – while centralised energy production will remain critical part of our energy system, an increasing share will be produced within individual homes and communities.
The role of government is not to try to prescribe the exact balance between these different solutions. It is to use public rules and finance to create market-based innovation for lowest cost solutions. Three tools seem paramount:
• Create competitive global energy markets in which there are no barriers to investment
• Put a price in carbon, either through taxation, emissions trading or regulation
• Use subsidy, procurement and regulation to drive the transition to new technologies
In the rest of this speech, I will talk about how we are applying these tools to the three main source of carbon emissions in this country: power, heat, and transport, and raise the prospect of a future ‘beyond oil’.
Power
Electricity makes up 31 per cent of UK carbon emissions. Most of this electricity is produced from fossil fuels. 37 per cent of electricity is generated by gas-fired power stations; 34 per cent from coal while 20 per cent comes from nuclear and 5 per cent from renewables.
The positive news is that there are ways of reducing our need for power, through greater energy efficiency, and switch to low-carbon sources of electricity.
Simple changes, such as low-energy light bulbs, fridges, and other domestic appliances or TVs without stand-by switches can have a significant impact on reducing our energy use. These changes create double dividends: lower home and business energy bills, and carbon savings.
But there are also ways of switching to low-carbon electricity.
Renewable power such as on and off-shore wind, tidal and solar power are at different stages of commercial viability. We are aiming to supply around 20 per cent of electricity from renewable sources by 2020. Unless we replace our existing nuclear power stations, we will have to increase our reliance on coal and gas, which would increase our emissions.
But perhaps the most crucial technology for the future of electricity supply is carbon capture and storage. A new coal-fired power station is built pretty much every week in China. Unless we can find ways of cleaning up coal, we are unlikely to meet the climate change challenge. Carbon Capture and Storage is not a new technology. It involves capturing the carbon emissions from the burning of coal and storing them underground in old oil and gas fields.
The question for government is how to drive the transition to energy efficiency and low carbon technologies at the speed and scale required to tackle climate change.
The precondition is putting a price on carbon. This is in place as a result of the Climate Change Levy, and the introduction of the EU Emissions Trading Scheme which includes electricity generators. We are publishing this week a widely endorsed manifesto from UK stakeholders for the future of the EU emissions trading scheme beyond 2012.
We are also supporting the development of new technologies through subsidies, in particular, via the Renewable Obligation.
But carbon pricing and subsidies are insufficient to drive the investment required, particularly in Carbon Capture and Storage. But according to Nick Stern on its own a long term carbon price will not be sufficient to drive investment. The carbon price required to create the framework for investing in CCS would be high, and potentially impose higher costs on the economy than regulation. It is for this reason, that the UK government has appointed consulting engineers to assess the feasibility of CCS, and we will take a decision later this year on whether to fund a demonstration project. It is also why we welcome the European Commission’s proposals on Carbon Capture and Storage: to support the creation of demonstration projects across Europe, to ensure all new coal power stations built from 2010 onwards are carbon capture ‘ready’ and to ensure that all new coal-fired power stations are fitted with carbon capture and storage from 2020 with the retro-fitting of existing coal-fired power stations thereafter.
Heat
Heating buildings makes up nearly a fifth of UK carbon emissions. In the average home, it makes up 73 per cent of emissions.
The story on heating is different to the power sector. Finding low-carbon sources of heating will be much more difficult. Using the waste heat from the electricity generation process – combined heat and power – is a priority, as is the development of biomass as a source of renewabl fuel. Heating homes with electricity is generally more inefficient and expensive, but if it is easier to create low-carbon electricity than direct sources of heat, it is a long term option.
But the priority must be to reduce our need for heating through much greater energy efficiency. Homes can now be built that require a minimum level of heating as they let more heat from sunlight in, and retain it better through insulation. Existing homes can also be retro-fitted. Cavity wall insulation reduces emissions and heating bills, with an average payback period of just over four years.
As with the power sector, incentives are necessary but insufficient. Energy efficiency does not tend to feed through into the sale price, though the introduction of the Energy Performance Certificate which will provide energy ratings for all homes put on the market could help to address this. Other market failures exist in the rental market, where the owners of domestic or commercial buildings do not have an incentive to increase energy efficiency because the savings from lower bills accrue to the tenant.
To address, this Ruth Kelly and Yvette Cooper have announced that over the next ten years, building standards will be ratcheted up to drive down carbon emissions, with all new homes built from 2016 being ‘zero carbon’. A third of the homes that will exist in 2050 do not yet exist, so new building standards can make a significant contribution to lowering emissions.
Zero carbon developments will use the minimum amount of electricity and heat, and generate their own energy from micro-generation such as wind turbines and solar-powered central heating. These technologies exist and are on the market now. But by setting a long term signal to industries that there will in future be large scale demand, we should stimulate a major increase in investment and R&D.
Transport
In transport, we face significant challenges. Economic growth has fuelled a major increase in car use and aviation. Transport emissions represent 23 per cent of total emissions, 90 per cent of which is road transport. Cars make up 60 per cent of road transport emissions, with Heavy Goods vehicles 23 per cent and Light Duty Vehicles 14 per cent. International aviation represents around 6% of domestic C02 emissions, though there are considerable non-C02 emissions associated with flying.
If we are to tackle emissions from transport, alongside investment in public transport, we must also focus on how to make travel more energy efficient, and on the role of low-carbon fuels.
In aviation, improvements can be made to reduce fuel consumption.
Richard Branson’s proposals to cut emissions by reducing the length of time aircraft have their engines on while at the airport, and adopt more gradual and fuel efficient descents are worth applying across the industry. Over time, we should see developments in the fuel efficiency of engines. But the technologies to create low-carbon fuels and make major reductions in aviations emissions seem a long way off.
In aviation, our policy focus must therefore be to bring aviation into the European Union Emissions Trading scheme at the earliest opportunity. By putting air travel within a cap and trade scheme that has teeth, we will ensure that overall emissions are driven down, within the EU or more widely across the world.
In road transport, on the other hand, there are major opportunities. Over the past decade, while car use has increased, carbon emissions have remained stable due to increases in fuel efficiency. In the short term, there is potential to achieve significant carbon savings from existing commercially viable technologies. According to the Society of Motor Manufacturers and Traders, this could happen without consumers having to buy smaller cars. Their analysis suggests we could reduce emissions from new cars by 30 per cent if all consumers bought the most fuel efficient vehicle in its category.
In the medium term, we should see the growth of lighter more fuel-efficient cars, biofuels and hybrid electric cars, including plug-in hybrid cars that can be charged externally. Studies suggest that as well as a 15 to 20% saving in carbon emissions from improving the efficiency of internal combustion engines, we could see a further 20 per cent improvement from hybrids. None of these technologies are new, but they are being developed in ways that can make them commercially viable.
In the longer term, fully electric and hydrogen cars are realistic options. Hybrid cars are creating a large commercial market for battery technology which could enable fully electric cars to evolve. The leading edge electric cars now have startling performance and battery range. For instance, the Lotus built Tesla has a top speed of over 130 Mph, a battery range of up to 250 miles, and has a lifetime of at least 100,000 miles.
Research suggests that if electric vehicles replaced existing cars, we would need an additional 12 per cent of electricity supply. Given that the re-charging of cars might principally take place over-night, we may need less expansion of generation capacity as charging would take place outside peak demand.
The potential carbon savings from electric or hydrogen cars could be huge.
Even if we assumed that this electricity was supplied at today’s current energy mix, the emissions from cars would be more than halved. Assuming we make more progress in renewables, carbon capture and storage and nuclear power, we could drastically cut the emissions from road transport.
The challenge we face is how to drive the transition to a low-carbon road transport sector. We already have a number of incentives in place, from vehicle excise duty and company car tax rules which incentivise people and businesses to buy lower carbon cars, to fuel duty rebate and the preferential tax treatment given to biofuels.
But the question we must ask, is are we doing enough? Words like ‘transformation’ and ‘radical change’ are used frequently in modern politics. But climate change is an issue which demands bold non-linear solutions. If we are to achieve a 60 per cent reduction in emissions by 2050, we must look at the most radical solutions and learn from how other countries are approaching the problem.
The most interesting and radical approach to this issue is coming from Sweden. In December 2005, the then Prime Minister Goran Persson appointed a Commission on Oil Independence. The primary rationale for the Commission on Oil Independence was to address climate change. For the avoidance of doubt, it was not about protectionism or about a fear that oil will ‘run out’.
But the commission were also driven by a concern about the impact of oil prices on Sweden’s economic growth and employment, by the impact of oil on peace and security across the world, and a desire to gain a first mover advantage in new environmental markets. Along with Finland, Sweden has the largest amount of woodland per inhabitant in the EU and were keen to expand the supply of energy from their forests and fields – what they called ‘green gold’.
The first milestone towards an oil-free economy, proposed by the ‘Commission on Oil Independence’, and agreed by the Government was to reduce petrol consumption by 40 to 50 per cent by 2020. Alongside this, they proposed that no oil should be used for heating residential and commercial buildings, and industry should reduce its use of oil by 25 to 40 per cent.
Of course every country is different so we need to develop a solution for our own circumstances. I believe that energy security and climate change objectives mean the time is right to look at what it would mean for the UK to create over a period of 15-20 years a post-oil economy – a declaration less of ‘oil independence’ and more the end of oil dependence. The challenge in respect of industrial processes and home heating is relatively small – since oil plays a small role in these areas. Around 8 per cent is used by industry for energy use, and 3.5 per cent used domestically, largely for heating. A further 13 per cent is used for non-energy purposes.
The biggest challenge is transport. But is it not insurmountable. After all, 20-30 years ago Brazil made the choice to ensure all of its cars were able to run on ethanol. Today they can, and over three quarters of the car fleet uses ethanol as a matter of routine. We need similarly far-reaching thinking.
Our own decisions will be important. Each year, 2.5 million new cars are sold and the UK has the potential to influence the future of car markets and the deployment of new technologies. Biofuels are not an environmental panacea, but the Renewable Transport Fuel Obligation aims to ensure a minimum of 5 per cent of fuel comes from biofuels by 2010/11, and we are looking at the case for doubling this figure.
However transport regulation is quintessentially a European issue – because it is at the European scale that we can maximise the environmental benefit and minimise the economic cost. That is why we welcome the determination of the European Commission to bring forward a mandatory scheme to reduce car emissions by 2012.
But what of the world beyond 2012? When the European Coal and Steel Community was founded in 1950, its role was to address national security and prevent another world war. In 1962, when the Common Agricultural Policy emerged, the priority was food security. Today, the challenge facing Europe is energy security and climate security. To renew its mandate, Europe needs to address citizens fears and aspirations of 2007, not 1945 or 1962. The EU must become the Environmental Union, and the drive to replace oil dependence with sustainable energy sources could provide the tangible expression of this mission and the basis for renewing Europe’s connection with its citizens.
Over the next year, I will be working with my European counterparts to look at the trajectory for reducing carbon emissions across the various energy sectors, and the potential for new policy instruments. In thinking through the opportunities to build a post-oil economy, we need to consider whether surface transport could become part of the EU Emissions Trading Scheme; we need to consider whether we should set a long term goal for vehicle emissions standards in 2020 or beyond that to signal our intent to develop an infrastructure that could support low-carbon transport in Europe.
The goal could not be clearer: for reasons of energy security and climate security take the carbon out of our fuel supplies. The means will be radical innovation in the private sector sponsored by clever use of all the tools available to government. And we will need the help of academia and civil society, so the newly created Centre for Energy Studies at the Business School here in Cambridge can help us too.
Conclusion
Energy security and climate change are challenges that we can rise to and meet together. The practical solutions and technologies exist. The prize is bigger than we imagine. A safer world, a fairer world, a more prosperous world.
The deeper challenge is about politics and policy.
I believe the lessons are becoming increasingly clear.
Climate change requires the power of markets to uncover the most cost-effective solutions. That is why in the long term, the vast majority of carbon emissions across sectors and across countries must be covered by a global carbon market. But markets in turn require governments to create and shape them – they require government to create and enforce the property rights on which markets depend. They require government to establish clearer frameworks in which markets can innovate; long term goals such as zero-carbon homes, carbon neutral power stations, and oil independence that can provide the clarity required for whole industries to change direction and change gear.
And industries in turn require governance not just at national level, but at a European and international level, across markets that have the critical mass.
So the test for politicians and policy makers, is I believe simple. To be pro-environment, you have to be pro-market solutions, you have to be pro-government intervention, and you have to be pro a Europe of reform and innovation. Nothing less will suffice. In climate change and energy security, that is the connection between technological progress and public policy.
Page published: 6 March 2007