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									                    'THE TRANSITION ECONOMY:
                    A FUTURE BEYOND OIL?'

Speech by the Rt Hon David Miliband, Secretary of State for the
Environment, Food and Rural Affairs

The Dr S T Lee Lecture on Public Policy at the University of Cambridge

                           5th 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

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

-    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

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

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

        Use subsidy, procurement and regulation to drive the transition to new

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'.


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

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

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.


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

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.


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.


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

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.

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