Last weekend there were two major international conferences: one on the crisis in the Eurozone - indeed, the future of Europe - the second in…
Last weekend there were two major international conferences: one on the crisis in the Eurozone - indeed, the future of Europe - the second in Durban on climate change. In news coverage, it wasn’t a contest. Durban scarcely got a look in. That isn’t really surprising - as was once famously observed: nothing quite concentrates the mind like the prospect of a hanging in the morning. But if we avoid the economic hangman, the issues of resource use and environmental sustainability will remain with us.
Let me start by explaining where I came from. Some of you may know me better for my work - and opinions - on banking and the financial crisis. But for much of my working life I have, as an economist, been working on the interconnected issues of economic development, energy and national resources. Long before I became Shell’s Chief Economist, in the mid 1980s, I helped to write the Brundtland - UN - Report, Our Common Future, which first described the concept of “sustainable development”: advocating growth but green growth. And the following year I helped to produce what I think was the first report to a summit of Prime Ministers on global warming and sea level rise.
People who like their politicians neatly labelled and pigeon-holed will wonder why I then worked for Shell - just as they wonder why as a left of centre social democrat I remain in this Government - but I see no contradictions. Big business, responsibly managed, and markets, property regulated, are part of the solution rather than the problem.
Those are the influences through which I see resource management issues. I start with basic economics, and with the masters. It is over 200 years since the Reverend Malthus first predicted that population growth would inevitably outrun the capacity of the land to provide enough food. In the years since, the effects of human ingenuity and new trading routes have shown him to be wrong - though not entirely. Fish depletion is a classic Malthusian problem and is sadly resulting in some irreversible damage to stocks. The sperm whale was driven to near extinction by the demand for blubber to light the pre-electric world. But for the most part resource pessimism has been misplaced.
There have been, in our lifetime, a series of Malthusian panics, sometimes about population, sometimes food, sometimes energy. I recall, in particular, the Club of Rome in the 1970s whose predictions, based on extrapolating the impact of exponential demand growth on fixed raw material supply, proved way off the mark. The Club of Rome failed, of course, to factor in markets and prices - in particular, the impact of rising prices on energy conservation, the switching from oil to nuclear coal and gas in thermal power, and the stimulus to new exploration and production.
I have similar arguments today with advocates of ‘peak oil theory’ - at least in its literal and narrow sense. We are seeing, today, much more intense pressure on supply capacity because of rising Asian demand - and a worrying dependence on the swing producer, Saudi Arabia. But we should not underestimate the impact of higher prices on demand, the technological ingenuity of the upstream oil industry - with new techniques like 4D drilling, the importance of new offshore suppliers such as Brazil, and the importance of unconventional fuels like tar sands which may, for the moment, have dirty extraction processes but are in absolute supplies. In a similar way high gas prices have produced a dramatic supply response - as in coal bed methane which has already created a gas surplus in the USA. There remain major problems of secure and non-polluting energy supply but this has nothing much to do with ‘running out of raw materials’.
And while these price effects on supply and demand are powerful, today we have reasons to doubt that markets alone can work. Security of supply has returned as a sensitive issue, particularly with energy, but also in areas like rare earths where China has such a large proportion of the market. To a degree supply security can be managed by a combination of buffer stocking and diversifying sources of supply. Neither of these will happen spontaneously without intervention by governments, however. And there are damaging pollution externalities to be taken into account, above all the damage caused to the environment by greenhouse gas emissions.
But this is an invitation to shape markets, rather than turn away from them.
Sometimes price achieves the right response. Aluminium cans are now much more eagerly sought for recycling because the cans are worth almost £1000 per tonne. So long as there is a smoothly working market in recycled aluminium, I am confident that the high price will do the job.
But the example of expensive metal reminds me that we sometimes need to be careful of the perverse consequences caused by strong price signals. A key element of our infrastructure Growth Review was to deal with metal theft, itself induced by the soaring price of copper and lead.
To give another example, a substantial carbon price will be essential to solve global warming. But a high carbon price that is not matched in competitor jurisdictions will induce carbon leakage. This is an issue that I became painfully aware of this year, as business after business came to me with solid evidence of how our own future high energy prices were making it uncompetitive for them to maintain investment in the UK.
That is why we are taking steps to ensure that the effect of our environmental policies is genuinely to cut global carbon emissions, not merely see them emitted elsewhere. That is simply foolish: we lose jobs; we lose firms; and emissions remain. That is why I am frankly disappointed by the negative attitude of some green groups to our action on energy intensive industries.
The subject of this conference - resource security, economic resilience, and the “circular economy” - is an open invitation to be ambitious in rising but augmenting markets. The excellent Green Alliance report that accompanies this event puts it well:
“economic instruments… correctly designed and in tandem with technical measures send a strong signal to the market, catalysing the transformation to a more sustainable society”.
So what is a sensible policy mix, and what should business and government do to realise it?
There are respects in which we would like to see industry take the initiative: developing smarter purchasing strategies and closing the loop with suppliers, for example by returning scrap material to help mitigate the resource risks to UK business.
And the best way for industry to mitigate the risks to resource supplies through the recycling, recovery, and substitution is often to start from the design stage.
Let us take rare earth metals as one example. Not many people appreciate how vital they are to modern devices like mobile phones. However, although they are used in small quantities, their location in each component is known, and their recovery can be significantly eased by designing this process in at the beginning.
Sometimes regulation is required. It is one of my department’s many responsibilities to implement the regulations required for the Waste Electrical and Electronic Equipment directive. They have real economic as well as environmental value, helping to support innovation, growth, investment and jobs. Everyone has a role to play - consumers, business end-users, manufacturers of products, recyclers, local authorities and waste management companies.
But the Green Alliance Report argues that the collective nature of the scheme dilutes the incentive for better design. Such design could help reduce our reliance on difficult-to-mine rare earths.
We want to improve that. After the negotiations on the revision to the WEEE Directive are concluded, we mean to take a hard look at how a system of greater individual producer responsibility might be introduced so make it better for industry and the environment.
Government also has a role to play in supporting technological innovation. My department with the Technology Strategy Board is in the process of launching a range of Technology Innovation Centres, now renamed catapults, designed to bridge the gap between university research and full commercialisation.
Innovation and research are classic ‘spillover’ activities, where the social benefits far outweigh the private gains. Therefore the government has a role in bolstering the activity. We are currently waiting for an announcement by the TSB of their choice of partners for the Offshore Renewable Energy Innovation Centre, which will play a big role in developing new low carbon technologies. This is an area of innovation which will simultaneously increase security of energy supply and combat global warming.
The Green Economy
The same combination of benefits comes from improving energy efficiency within domestic homes - one that puts consumers in charge by giving them the right incentives to invest in their homes. As well as dealing with a major cause of carbon emissions, this could create a new commercial opportunity for business.
The Green Deal establishes a framework allowing businesses to offer consumers energy efficiency improvements to their homes at no upfront cost, instead recouping payments through instalments on bills. The Government is providing £200m funding to encourage early take-up and stimulate the market for these services.
The Green Deal is at the heart of the plans we have set out to support the transition to a green economy.
Green Investment Bank
Another area of useful government intervention is in dealing with persistent market failures to provide finance. This is one reason we have created the Green Investment Bank. It will be a critical component in the UK’s transition to a green economy and its overarching objective will be to catalyse private investment - not replace it
The novelty of low carbon technologies and the uncertainty over the long-term future of these nascent markets means many projects would not get off the ground without government intervention.
Today, building on our constructive dialogue with the European Commission in respect to the State Aid Rules, I am able to announce further details of how the bank will operate.
We intend it to have a broad remit, both for commercial investments, and on state aided terms where we have developed strong evidence that such aid is necessary.
Its task is an urgent one, and so - after State Aid approval - I plan to form the company and begin the formal recruitment process for the board and senior management team early next year, with a view to making the first appointments to the GIB’s board, including that of the Chair in Spring 2012. There has been considerable interest in where the Bank - which we think will have between fifty and seventy staff in the period up to 2015 - will be located. I have today published the detailed criteria that I will take into account in reaching a final decision in February on where the GIB will be based.
The Bank will operate independently from government, but will agree its strategic priorities with the Government. Subject to approval by the European Commission, these should include offshore wind, commercial and industrial waste, energy from waste generation, non-domestic energy efficiency and support for the Green Deal.
At least 80% of the funds committed by the Bank over the Spending Review period will be invested in these priority sectors, with the remaining funds invested in other green sectors.
However, it is clear that we need to take immediate action to accelerate private sector investment in advance of State Aid approval for the GIB. So I have set up a new team of project finance professionals, within my Department, to drive investment in the UK’s green infrastructure from April 2012.
The Government has committed £3bn to this project which we expect to draw in a further £15bn in private investment.
The Green Deal and the Green Investment Bank will together help to reduce energy use and promote energy diversity, helping with resource security and reducing emissions. But they are part of a much bigger picture.
There will still, for example, be need for a lot more gas in power generation alongside renewables, including nuclear if it can operate safely and without the vast subsidy enjoyed in the past. The emerging gas extraction technology suggests that Britain may have a lot more gas than we currently think - in improbable places like Blackpool - but there will still be need for diverse overseas supplies through pipelines and LNG. And, of course gas, though a relatively clean fuel, generates CO2 and the development of carbon capture and storage (CCS) is becoming pressing, therefore.
We need also to make progress in oil’s last big market: transport. I am more optimistic than some that price pressures will lead to more fuel efficient vehicles and moderation of demand. But there is a need too for government to continue to promote low carbon vehicles and the infrastructure for electric vehicles.
And that, I think, is the formula for resource security: let markets work and let business pick up market signals but recognise that government also has a key role in supporting innovation and in setting the right price signals to move to a more sustainable low carbon economy.