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George Osborne: Speech to the Green Alliance

In a speech to the environmental organisation Green Alliance, George Osborne said:

"I'd like to thank the Green Alliance for their kind invitation to speak here today.

It is my opportunity to thank Stephen Hale and everyone at the Green Alliance for your tireless campaigning and advocacy on environmental issues.

I think it's apt that this event on climate change should be held here at the Royal Society of Medicine.

After all, this Royal Society was founded during the intellectual ferment of the Enlightenment, as men and women came together to apply rational analysis to all spheres of human activity.

Today, when it comes to the environment, this clear-sighted and rational approach to policymaking is needed more urgently than ever.

My argument this evening is that the combination of interlocking concerns about energy security, rising oil prices and climate change represent an unprecedented opportunity to take action against climate change.

These issues bind together the interests of governments, businesses and consumers alike, and could provide us with the mandate, and the will, to push for lasting long-term solutions.

As David Cameron put it in his speech on the environment last month, these pressures mean we cannot afford not to go green.

So today, I'd like to concentrate on the rational economic instruments we have at our disposal to make the most of this window of opportunity, and how these instruments can provide us answers to four of the questions that are currently being put to politicians and campaigners.

Let me take each question in turn.

The first question is this: Is cap and trade scheme really the silver bullet we've all been looking for?

It certainly appears that the Government thinks so.

As a politician, I can see the attraction .

You don't have to confront the electorate with the direct consequences of taxation.

The indirect costs of cap and trade don't create newspaper headlines.

Of course, it makes sense to put a price on carbon.

Because as we all know, the carbon emissions that contribute to climate change are a classic example of what economists call externalities.

Individuals and businesses do not face the full consequences of their actions when they emit carbon.

As a result the market produces too much pollution and too little investment in new technologies that can reduce it.

Since this is a market failure, we need to use market mechanisms to address this problem.

Green taxes and emissions trading potentially provide two market-based solutions to this problem.

With green taxes, the government sets the price; with trading, it sets the quantity.

For those who believe in markets, emissions trading schemes can at first sight appear to offer a complete framework for international action on climate change.

This is understandable given that trading schemes are in theory highly efficient mechanisms for incentivising cuts in emissions and investment in new green technologies.

As Green Alliance state in their excellent pamphlet being published today: "Trading seems to have become the default policy of choice."

Cap and trade may be convenient for politicians.

But a growing body of opinion is coming to the conclusion that the results can be very different once schemes make the transition from the economics textbook to the real world.

Your pamphlet on the limits of carbon trading makes an important contribution to this debate.

Handing out permits for free is a clear problem. This violates the principle that the polluter should pay and can fail to shift demand from carbon-intensive activities.

This has been a huge problem with the European Emissions Trading Scheme.

The lack of transparency is another concern. Trading schemes can be bureaucratic, vulnerable to gaming and even, on occasion, fraud.

And the uncertainty about price can deter investment rather than encourage it.

Of course, trading schemes have an important role to play.

Don't get me wrong.

Conservatives support markets that work.

But, we should auction permits instead of giving them away.

Over a year ago, for example, we announced that we would auction 100% of carbon permits in phase three of the ETS.

We made this decision because handing out permits for free violates the principle that the polluter should pay, and we're pleased that the Government has followed suit.

We should tighten up the trading system to tackle potential fraud.

And we should put a floor under the price of carbon using green taxes.

This makes sense.

Green taxes can provide certain and stable price signals for business, and they can designed so that they are simple, transparent and difficult to avoid.

This brings me to the second question I'd like to address today.

Are people right to say, as they increasingly do: "Well green taxes are fine in theory, but in practice there's no public tolerance for them?"

Let's deal with the theory first.

As the Stern Review made clear, one of the key advantages of environmental taxes is that they "can be kept stable, and thus do not risk fluctuations in the marginal costs that could increase the total costs of mitigation policy."

A stable carbon price helps individuals and businesses to factor environmental costs into medium and long term decisions about investments and changes in behaviour.

What's more, green taxes can be an effective tool for changing behaviour.

It is well established that, for most energy use and transport, price elasticities are between zero and minus one, meaning that an increase in the tax rate will change behaviour.

Not only that, but the size of the elasticity means there will typically be additional revenues generated that can be used to reduce taxes elsewhere.

As leading green academic Professor Paul Ekins has rightly pointed out, this type of green tax switch might be termed a "win-win-win" outcome.

Society benefits from lower levels of pollution.

Taxpayers benefit from reduced taxes on work and investment.

And the Treasury benefits from a tax base that is less reliant on labour and mobile capital that are increasingly difficult to tax in a global economy.

The problem is, the way green taxes have been used recently have had none of these benefits.

Because they've been poorly targeted, they did not lead to lower pollution.

And because they were not used to reduces other taxes, they did not deliver any benefits to taxpayers.

Let me give you an absolute classic example of this.

The Government's current policy on Vehicle Excise Duty.

It's poorly designed, meaning the additional tax on a Hummer is £55, while the extra tax on a Ford Mondeo is up to £220.

It's poorly targeted because it hits ordinary familiy cars bought up to seven years ago.

And even the Treasury admits that it will have a negligible impact on vehicle emissions.

It's only there to raise revenues - and none of this will be used to reduce taxes elsewhere.

This is not only bad policy. It's bad politics too.

No wonder green groups like Greenpeace have said that this was the type of measure "that gives green taxes a bad name".

So let me cut from theory to practice.

The public's trust in green tax has been poisoned by the behaviour of this government.

And I don't underestimate how difficult it will be to rebuild public confidence that green taxes are genuine environmental policy instruments, and not just stealth taxes.

But I am absolutely determined to rebuild this trust.

Because I think it's the right thing to do for the environment and the economy.

That's why we are working hard with many of you in this room to ensure our green tax measures are well targeted on the environmental goals we set out to achieve.

And that's why, as we fulfil our commitment to raise the proportion of the tax take from green taxes, we will put all the revenues from new green taxes into an independently audited Family Fund.

This will guarantee that every penny of additional green tax revenues is used to reduce taxes elsewhere.

It's the best way to restore long-term public support for green taxation while tackling climate change and other environmental challenges.

Let me give you some examples in practice of proposals we've made on green tax.

For a start, we are committed to overhauling aviation taxation so that it targets the most polluting aircraft and incentivises cleaner and fuller planes.

I'm glad that the position we took with, to be fair, the Liberal Democrats, pushed the Government last autumn into adopting the principle of a per flight tax.

We will reserve judgement on the detail.

Another green tax change we'll introduce is to replace the flawed Climate Change Levy with a Carbon Levy.

At the moment, the structure of the Climate Change Levy means the rates paid by businesses on their energy use do not accurately reflect the carbon emissions from that energy, and so provides no real incentive for businesses to switch to low carbon sources of energy.

As the Royal Commission on Environmental Pollution put it, it's a "blunt instrument" that would "not be effective in reducing carbon dioxide emissions".

That's why our Carbon Levy would distinguish between high and low carbon production of energy, and so encourage companies to switch to cleaner energy sources.

And as you will have seen this week, we are also consulting on the reform of fuel taxation with the introduction of a Fair Fuel Stabiliser.

This would provide stability not just to the public finances, but also in terms of long-term environmental signals.

Let me explain exactly how this policy would work.

Currently, when oil prices rise, the government receives a windfall increase in tax revenues, mainly due to taxes on North Sea oil production. And when oil prices fall, the government suffers an unexpected shortfall in revenues for the same reason.

As the Stern Review made clear, one of the key advantages of environmental taxes is that they "can be kept stable, and thus do not risk fluctuations in the marginal costs that could increase the total costs of mitigation

It would, crucially, help maintain public confidence in fuel duty taxation - confidence now clearly lacking.

So a more efficient environmental tax on fuel would be one that helped to reduce volatility in the price of fuel faced by consumers.

That's exactly what the Fair Fuel Stabiliser is designed to do.

Under a Fair Fuel Stabiliser, when fuel prices go up, fuel duty would fall. And when fuel prices go down, fuel duty would rise.

This would strengthen environmental signals when oil prices fall, and help reduce volatility in the price of fuel faced by consumers.

By creating a more stable price for carbon, in line with Stern's recommendations, this approach will help encourage a long term shift towards lower emission vehicles and alternative methods of transport that do less damage to the environment.

In sum, it would make our ability to meet our climate change targets for reducing emissions less dependent on volatile international oil markets.

The Government's knee jerk response this week was to oppose our Stabiliser.

I hope they think again and remember that David Miliband called on Gordon Brown to introduce this policy when he was Secretary of State for the Environment.

Whatever they do, we are consulting on this policy right now, so please do read the detailed consultation paper we've published and send us your views.

We can only listen if you speak.

The rising price of oil brings me to the third of the four questions .

Does the high price of oil means that the market will drive green technology development without any government interference?

It's certainly true that the 80% increase in the price of a barrel of oil over the past year has focused commercial attention towards new green technologies.

But I believe the evidence of the past ten years shows that we cannot just sit back and hope that this change takes place as quickly or sustainably as we need.

Government has a role to play.

This was acknowledged by the CBI in a recent report, which concluded that:

"Market forces will drive big changes, but they will not by themselves be enough to do the job. The full range of public policies must be deployed to create the right incentives."

As we all know, the UK is currently failing to fulfil its potential when it comes to the development of green tech.

That's why it is Japanese and American companies, not British ones, that are leaders in the field of fuel cells.

It is German and Swedish companies, not British ones, that are leaders in the development and sale of wind turbine technologies.

According to official government figures, UK firms have less than a five per cent share of the global market for green goods and services - less than France, Germany, Japan and the United States.

These official government figures also show that the market shares achieved by Germany and France, normalised to their GDP, are around 50% higher than the UK's share.

So this isn't just an environmental problem - it's an economic problem too.

The global market for green goods and technologies is expected to be worth hundreds of billions of pounds in the years ahead.

There is a massive opportunity out there for British companies to lead the world in developing new green technologies, provided that the government plays its part.

Take Carbon Capture and Storage, for example.

By capturing the carbon dioxide produced in generation and burying it underground, CCS could reduce our coal-based carbon emissions by up to eighty-five percent.

And we in Britain are fortunate to have the infrastructure needed to drive this technology forward.

We've got the depleted oil and gas fields in the North Sea in which to store the carbon.

We've got, at the moment at least, a critical mass of energy experts who are at the forefront of this new technology.

And we've got a manufacturing and energy industry that is capable and willing to make long-term investments to kick-start this new field.

This is a fantastic opportunity for Britain to be a world leader in an exciting new technology that we know has the potential to play a huge role in cutting emissions and fighting climate change.

As David Cameron has said, "Right now, our generation has the chance to change our whole relationship with coal and transform the way we generate energy."

So it just beggars belief that the Government is allowing our competitors to get a head start on us.

I've actually been to Peterhead, near Aberdeen, where BP prepared a demonstration scheme, and seen the opportunity that was passed up because the Government dragged its feet.

We are determined to do things differently.

A Conservative Government will follow the Californian model, and implement an Emissions Performance Standard.

This would mean the carbon emissions rate of all new electricity generation in our country cannot be any higher than that generated in a modern gas plant.

Such a standard would mean that a new generation of unabated coal power plants could not be built in this country.

What's more, a Conservative Government would take money from the auctioned EU Emissions Trading Scheme credits and use it to fund at least three CCS demonstration projects over the next five to ten years.

By funding three demonstration projects, we could have the beginning of a CCS pipeline system which future British - and European - companies could plug into.

And by sending out the clearest market signal yet to UK power developers that their product must be clean, we can propel further innovation within our energy sector.

This is a great example of how we can harness the power of markets and innovation by giving businesses a secure framework for investment.

Creating a stable framework for CCS isn't the only way we will encourage investment in emerging green technologies.

In a speech I gave at Imperial College earlier this year, I announced that we are working with the London Stock Exchange to set up the world's first trading market for green technology companies.

This Green Environmental Market - or GEM - will provide new capital and opportunities for green companies from Britain and across the globe.

I asked one of Britain's most experienced financiers and committed environmentalists, Stanley Fink, the former chairman on Man Group, to lead a working group of some of Britain's leading financial experts to set out detailed technical proposals for how this market could work.

I'm pleased to be able to tell you that the working group will report back with its recommendations this autumn, and I'm looking forward to hearing your thoughts when their report is published.

And in addition to these policies on CCS and GEM, we have set out a range of concrete proposals on feed-in tariffs and green technology incubators that will help promote the development and deployment of microgeneration and other environmental goods and services.

Taken together, these policies represent a step-change in the incentives for new green technology development.

I believe they show how the government can play an important role in driving forward new green technology, benefiting the economy and the environment.

The fourth and final question I'd like to consider today relates to the public attitude towards the environmental agenda in general.

There's increasingly an argument being aired that that the public might put up with the green agenda when the going's good, but not now that the economy is slowing and they're feeling the pinch.

But the fact that oil prices are rising, utility bills are higher and it's now more expensive to fill up your car, should make it even more urgent that we act.

So when people are feeling the pinch, we need to make it pay to go green.

As we have announced before, we are looking at introducing new Green Individual Savings Accounts, which will enable the public to save more than they currently are allowed tax free, provided these funds are invested only in environmentally friendly companies.

These Green ISAs will engage the public in a new way in the issues around climate change - and show them very clearly the economic benefits of green investment.

And by providing lucrative new sources of that investment, Green ISAs will create a race to the top by incentivising businesses to adopt environmentally friendly policies.

Patrick Snowball, the former head of Norwich Union, and one of Britain's most experienced retail financiers, is leading a technical working group to look at exactly how the GISA should be designed and implemented.

He will report back later this year, and I'm looking forward to receiving his recommendations.

And today, let me tell you about another of our innovative policies to nudge people to go green.

Right now, the UK has one of the lowest recycling rates in Europe.

In 2005, the most recent year for which comparable figures are available across the EU, UK households sent 22.6 million tonnes of rubbish to landfill.

The Government's approach is an old fashioned one: use the threat of fines and punitive taxation to force people to recycle.

We've all seen how unpopular this heavy handed approach has been with the public.

What's more, it is extremely expensive to administer and it encourages irresponsible behaviour like fly-tipping or back yard burning.

But if we look at what is happening in over 500 cities and communities in America, we can see that another way is possible.

There, instead of being fined for not recycling, households are actually being paid for their recycling.

Instead of using sticks, we can use carrots instead.

Instead of punitive taxes, we can use financial incentives.

This completely turns on its head the tired way that the government thinks about recycling.

Let me explain how the mechanism works.

In America, as in the UK, councils have to pay landfill tax for every tonne of waste they fail to recycle.

What companies like RecycleBank do is say to councils and city administrations: if we reduce your landfill tax bill by pushing up recycling rates, then how about we split the savings?

Recyclebank then use this money to pay households up to $50 a month for their recycling.

And the more they recycle, the more they get paid.

The best part is that none of this impacts on public expenditure in any way.

This approach has achieved some startling results.

In some communities, it has increased the amount of household waste being recycled by more than 200 per cent.

And there is an important equity dimension too.

While the poorest households were previously the least likely to recycle, as soon as they start receiving a financial incentive for recycling, they typically become amongst the most likely households to recycle.

I want to see this innovative approach rolled out across the UK.

So I'm pleased to be able to report that we are working with the Local Government Association, the Mayor of London and Conservative local authorities such as Windsor and Maidenhead to establish how paying the public to recycle schemes might be implemented in the UK.

And I think it's right that we think about what else we can do to promote this innovative approach in the UK.

The Government has announced that the standard rate of landfill tax will increase by £8 per tonne each year until 2010-11.

However, no information has been provided beyond this date.

That simply isn't good enough.

We need to provide long-term stable framework that enables entrepreneurs to introduce innovative waste solutions in the UK.

That's why I can today announce that we will provide a commitment that we will put a floor under the announced 2010 level of landfill tax until 2020.

This will guarantee that the landfill tax will not fall in real terms, and provide a stable tax environment for long-term investment.

In addition, this will send a powerful signal to businesses and councils that innovative approaches like these are possible, while continuing to provide the government with scope to increase the tax rate further.

And it shows once more that we are continuing to push the envelope when it comes to innovative new ways of encouraging the public to go green.

The stark contrast between us and the Government could not be clearer.

While Labour want to regulate, ban and interfere to get their way, the Conservatives want to work with people and give them incentives to act in a socially responsible way.

Let me end by saying this: the fight against climate change is one of the greatest challenges my generation faces.

We will not shirk from this fight.

And now is the time, with rising oil prices and concerns about energy security, to create a lasting coalition for environmental change.

I want the Treasury in a Conservative government, in a cool and rational way, to put in place the economic instruments to reduce emissions and meet our ambitious green goals.

I don't pretend that any of this will be easy.

There will be difficult battles ahead.

I want to listen to you, talk with you and work with you in the months ahead so that the Conservative Party is not just in a position to win the next General Election, but also ready to drive forward the environmental agenda from day one of a Conservative government.

The time for action is now.

Future generations will not forgive us if we fail.

Thank you."

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