Jeremy Warner's Outlook: Governments can tackle climate change by giving everyone their own carbon allocation

European competitiveness; Benefits of Mifid outweigh costs
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The Independent Online

One of the most shocking and, regrettably in some respects, galvanising statistics of the week was the news from the Office for National Statistics that environmental taxes have fallen to their lowest level as a share of the economy - just 2.9 per cent - in at least 18 years.

For any Government that talks a green agenda, this is an astonishingly low number. Eighteen years ago, when it was last as low as this, global warming was an area of concern confined only to a tiny minority of eco-junkies. Little was written about it, and, as a political issue, it was virtually non-existent. Today, the debate is impossible to avoid. It gets more column inches than any other single issue you can think of.

Yet though we have a Government which talks tough about the environment in the wake of the Stern report on global warming, it has so far done so little about it that we might as well be back in the mid-1980s, when few had even heard of climate change. The ONS figures are starkly illustrative of this lack of action.

Unfortunately, there is a big downside in showing up governments in this way. Gordon Brown, the Chancellor, now has all the excuse he needs to whack the country with another big tax rise. If the rumour mill is correct, he aims to do precisely that in next month's pre-Budget report. Air passenger duty, an extraordinarily crude form of environmental tax of debatable efficacy in terms of its impact on emissions, is now virtually bound to rise significantly and, at the very least, the inflation link will be restored on fuel duties. No doubt there will be other green taxes too. The test is whether Mr Brown makes these increases revenue-neutral by reducing the tax burden on employment and business elsewhere, or whether they come to be used simply as another revenue-raising device. Now why does the latter seem so much more likely than the former?

Personally, I doubt whether anything other than crippling rises in air passenger and fuel duties will have any effect on emissions at all. People will just grumpily swallow the tax rises and carry on as before. There is in any case something unmistakably Stalinist about trying to address climate change by forcing people to use cars and planes less. Of course, car and aircraft users should be made to pay their environmental costs, but when the proceeds are going straight into the Government's coffers for spending on other things, economically productive or otherwise, rather than to carbon offset projects, the net environmental gain seems pretty questionable.

As Hilary Benn, the International Development Secretary, said this week, it is, in the end, up to individuals, not governments to address these issues. Making small changes to the way we live can make a big difference. Over time, being environmentally unfriendly might come to be seen as a bit like drink-driving, a once-tolerated activity which today prompts universal social disapproval. Yet relying on people voluntarily to cut emissions is unlikely to be enough. Where governments can help is by facilitating the development of individual carbon allocations, which can be sold by low users to higher ones. This is a concept which even five years ago would have been widely regarded as completely bonkers. Yet it is an idea whose time has come. Already it is considered a serious policy option in some developed countries. As an alternative to the sledgehammer of higher taxation, it has plenty to commend it.

European competitiveness

Much debate this week at the European Leadership Forum, a BusinessWeek event in which The Independent is a strategic partner, about European competitiveness, combined with the usual despair about the glacial pace of structural reform in the engine room of the European economy - Germany and France.

Yet there are glimmers of hope, and there was general agreement among the business leaders, opinion formers and policymakers who made up the conference that there is much to be proud of in European business and economic wellbeing. Perhaps it would help if Europeans stopped beating themselves up the whole time, and focused on their successes.

Prime among these is that the European economy is at last growing at a decent pace again. There was a slowdown in the third quarter, leading all the usual suspects to declare another false dawn. But just recently, things seem to have picked up again in France, and the most recent surveys of German business confidence have been buoyant, flying in the face of the global economic slowdown and the fear that sales tax rises slated for early next year will cause consumer spending in Germany to slump.

Never mind China, India, Japan and the United States, it is Germany which is now the biggest exporter of goods in the world, and, though plainly much more needs to be done on labour market reform to give Germany the vibrant service sector we have in Britain, there is tangible, albeit slow, progress being made.

The real point about Europe, however, is it is not actually a single economy at all. Despite the euro and the single European market, nor is it likely to become one any time soon. Rather, it is a collection of very different economic systems and models. Some of them, such as Ireland and now the accession states of eastern Europe, are growing with all the speed and vigour of the emerging markets of the Far East. These economies hardly need lessons from Britain on how to get it right.

Indeed, the debt-fuelled nature of relatively strong economic growth in Britain is a growing cause for concern across Europe. Scandinavia is a different economy still, and highly successful it seems to be at combining relatively strong economic growth with full employment and state-of-the-art social safety nets. These are societies which seem to have got their response to the challenge of globalisation about right, with a high concentration on knowledge-based industries and a heavy focus on training and education. At the same time, they have established proper protections for those most likely to be disadvantaged by the onslaught of low-cost competition. These models provide a template for others.

Despite the self-deprecation, Europe has also managed to spawn a number of industries which are global leaders in their fields. A good example is wholesale financial services, where the City of London is now recognised as the pre-eminent international financial centre in the world. The reasons for this success are many and varied - in my view, American foreign policy, which has alienated the petrodollars of the Middle East and Russia, has become one of the biggest, helping to undermine New York's traditional role as the main conduit for international money. Yet another is surely the cluster effect the City has achieved in acting as a focal point for the best financial brains and skills in Europe and beyond.

This is plainly a model that can and ought to be applied to other industries. Yet to work, it needs free labour markets and a liberalised regulatory environment. That is still a long way from being a reality throughout much of the Continent. All the same. We Europeans have much to celebrate. Our diversity is likely to be one of our key strengths in the globalised economy now fast becoming the over-riding reality.

Benefits of Mifid outweigh costs

Like all regulation, Mifid, or the European Union's Markets in Financial Instruments Directive, carries a heavy burden in terms of its initial and ongoing compliance costs. In a paper published yesterday, the Financial Services Authority calculated the cost to the City of implementing Mifid at between £870m and £1bn. The ongoing costs of compliance will be around £100m, the FSA believes.

Thanks a lot, Brussels. There's another apparently useless yet exceptionally expensive piece of regulation heaped on our already beleaguered shores.

But hold on a moment. Isn't the whole point of Mifid to create a single European market in the trading of shares, bonds, derivatives and other financial instruments? And if it succeeds, won't the opportunities it opens up for the City vastly outweigh the heavy upfront costs? That indeed must be the hope for a piece of legislation which, though it comes from Europe, is to a great extent modelled on the British-invented regulation which already exists in the City. As Europe's pre-eminent financial centre, the City should gain more from it than anyone else, as markets previously closed to London are steadily prised open. The figure is probably meaning- less, but the FSA thinks these benefits may amount to £200m a year. Over time, the benefits should easily outstrip the costs, the FSA insists. Believe it if you will.

j.warner@independent.co.uk

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