The CBI - cheerleader for government intervention, promoter of vested interests, or both?

According to their website, the CBI's mission is:

"to help create and sustain the conditions in which businesses in the United Kingdom can compete and prosper for the benefit of all"

and their policy is:

"decided by our members – senior professionals from all sectors and sizes of business are directly involved in the policy-making process"

In the experience of this author, the CBI are now complicit in the government's ever-expanding intervention in the economy, and listen only to their bigger members. A recent exchange of correspondence seemed to illustrate this attitude. It is repeated below - decide for yourselves.

 

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Subject: The CBI's Weekly Update on Vital Business Issues, Issue 40, Week Ending 03 November 2006
Date: Thu, 2 Nov 2006 17:57:43 +0000
From: BusinessUpdate@cbi.org.uk

CBI LEADS RESPONSE TO CLIMATE CHANGE REVIEW
# Sir Nicholas Stern's report on the economics of climate change, published
this week, backed the CBI's view that tackling climate change is essential
and that international co-operation is key to ensuring the costs are
manageable. Alongside the Stern Review, the Government also announced new
climate change legislation, which aims to formalise the UK's existing
long-term carbon reduction goal into a statutory target, establish interim
milestones towards it and put in place emissions reduction measures to
achieve these targets.
# As part of the CBI’s ongoing lobbying activities on climate change, the
CBI’s Director of Business Environment, Michael Roberts, met with the
Secretary of State for Environment, David Miliband, to put forward our
early views on this proposed legislation. Separately, CBI Deputy Director
General, John Cridland, met with David Miliband to discuss the Government's
vision statement on the future of the EU Emissions Trading Scheme, also
published this week. While welcoming proposals to improve the efficiency of
the current trading scheme and to build a global trading market, John
highlighted member concerns with regard to the extending the scheme to new
sectors and auctioning permits on competitiveness.
Contact: mailto:matthew.farrow@cbi.org.uk or
mailto:gillian.simmonds@cbi.org.uk

CBI WELCOMES FIRST STEPS TOWARDS UK ‘INNOVATION AGENCY’
The CBI has responded warmly to the announcement that the business-led
Technology Strategy Board (TSB) will become an independent body steering a
“relentlessly business focussed” technology and innovation strategy. The
CBI’s Director-General, Richard Lambert, noted that the changes lay the
foundations for the coherent, long-term innovation strategy the CBI has
being lobbying for. The CBI will continue to lobby the Government to remain
ambitious when setting the detailed remit for the TSB, to ensure the
effective use of public procurement budgets and to give the board the
budget it needs, at least £625m a year.

CBI PROMOTES ‘ENTERPRISE ENVIRONMENT’
At a CBI launch earlier this week, Richard Lambert and Margaret Hodge
debated small business growth issues following recommendation in the recent
CBI report, 'Enabling the Enterprise Revolution'. Richard emphasised that
government must place greater focus on enabling businesses to grow by
reducing the regulatory burden, correcting anomalies in the tax system and
ensuring that finance is available.

 

 

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Subject: [Fwd: The CBI's Weekly Update on Vital Business Issues, Issue 40, Week Ending 03 November 2006]
Date: Thu, 02 Nov 2006 19:41:17 +0000
From: Bruno Prior
To: Matthew Farrow

 

Matthew,

There are only a couple of months left before we would have to decide
whether to renew our membership or confirm our resignation as intended.
The idea was to see whether you were able to satisfy any of my
criticisms, but so far I'd say there's been no progress, wouldn't you?

Now we have this in the latest Update:

"While welcoming proposals to improve the efficiency of the current
trading scheme and to build a global trading market, John highlighted
member concerns with regard to the extending the scheme to new sectors
and auctioning permits on competitiveness.
Contact: mailto:matthew.farrow@cbi.org.uk"

Whilst one could make a good case that the EU-ETS is hopeless and should
be scrapped, auctioning is essential, if the scheme is to continue, to
remove the strong competitive advantage given to dirty incumbents by the
grandfathering mechanism. A continuation of EU-ETS in it current form
(including grandfathering) is the worst of all worlds for all but the
big businesses who profit at everyone else's expense from this
mechanism. This statement confirms to me what everyone says about the
CBI: it is the Confederation of Big Industry, or the 18% club as someone
put it. There was no consultation of your members, that I am aware of,
on whether this is a reasonable view. Auctioning permits would have an
impact on competitiveness only in the sense that it would remove an
unfair advantage, and that is something the CBI should be ashamed for
resisting.

I'm not much impressed either that you think yet another quango (the
Technology Strategy Board) needs to be funded to the tune of "at least
£625m a year". Does the TSB not sound just a little Wilsonian to you?
What good came out of 60s and 70s governments' efforts to pump money
into R&D and the "white heat of technology"? White elephants like our
nuclear programme, technologically-inferior, centrally-controlled
manufacturing, and spiralling debt and inflation, is what we got, and
what we will get again. Is there no one in your organisation at least
making this sort of argument?

This might have been considered in your "Enterprise Environment" report
on "small business growth issues", as might the overall tax burden
required to pay the £31bn annual cost of all these quangos. But instead,
"Richard emphasised that government must place greater focus on enabling
businesses to grow by reducing the regulatory burden, correcting
anomalies in the tax system and ensuring that finance is available." The
first point would be fine, if you weren't so supportive of the quangos
that are intimately intertwined in the over-regulation. The anomalies
are one thing, but what about the overall tax level? And how is
government to "ensure that finance is available"? That is a classic of
interventionism that has never worked and never will. These are soft
targets that everyone can cheer without there being any chance that
anything will be done about them, and without raising the more serious
issues that your partners in government would rather were left alone.

Let's put an end to the charade. We will not be renewing our membership.
Your organisation provides nothing of value to us, and does not
represent us, nor even care what we might think about your
pronouncements. If there were a representative of industry that promoted
small government, minimal intervention and level playing-fields for all
businesses (big and small) and externalities, it would have value to us,
but the CBI instead seems to be interested in what it can get out of the
government, primarily for its bigger members, with the occasional sop
for its smaller members. That is no way to promote wealth-creation.

Yours,

Bruno Prior

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Subject: Re: [Fwd: The CBI's Weekly Update on Vital Business Issues, Issue 40, Week Ending 03 November 2006]
Date: Tue, 7 Nov 2006 09:10:46 +0000
From: Matthew Farrow
To: Bruno Prior

 

Dear Bruno,

Many thanks for your e mail (as always direct and thoughtful!). I want to
start by responding in particular to your points on auctioning.

I agree that auctioning is the right approach to emissions trading under
economic theory. But if firms inside EUETS are competing on price with
firms outside, then auctioning gives them a cost burden not borne by their
competitors, preventing the level playing field you are calling for, and
potentially driving their UK operations out of business. Having said that,
yes, grandfathering in perpetuity risks reducing pressure for attainable
carbon reductions, so we are exploring benchmarking and international
sector agreements as options. I accept these are not elegant policy
options, but they probably give the best chance of combining the economic
aim of ETS - incentivising the most cost-effective carbon abatement - with
the avoidance of compromising parts of the UK manufacturing sector for no
good economic or environmental reason.

I would also take issue with your conviction that this is a big vs small
debate in CBI membership. There are some large CBI members who speak up in
favour of auctioning in these debates, and equally I get a lot of lobbying
from small energy intensive companies who are facing crippling rises in
energy costs and are hostile to any policy, such as auctioning, that might
add further pressure to energy prices.

With the Commission's review of EUETS for Phase 3 under way, we will be
shortly starting work on the technical options for developing EUETS. I
will make sure that the issues you have raised about EUETS will be flagged
up in the staff discussion papers for this work, and of course along with
other interested member you would be consulted on this.

On the Technology Strategy Board, we support this as a mechanism to link
the £150bn public procurement budget (which like you we would like to see
smaller) with the science the government already funds, and to start to
develop incremental and radical new approaches to technology and services
that actually meet government needs. We aren't looking for white elephants,
but to accelerate the development of solutions to real problems, get them
demonstrated, and get them put forward into procurement rounds.

You question why CBI is not advocating a smaller state - in fact this is a
constant theme of our lobbying. Our current work on the Government's
Comprehensive Spending Review has been guided by the strong member push for
CBI to demonstrate how total tax burden can be reduced and Goverment focus
efficiently on the things only it can do.

Kind regards

Matthew

 

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Subject: Re: [Fwd: The CBI's Weekly Update on Vital Business Issues, Issue 40, Week Ending 03 November 2006]
Date: Tue, 07 Nov 2006 20:35:29 +0000
From: Bruno Prior
To: Matthew Farrow

 

Matthew,

Thanks for replying. I doubt you will be surprised to hear that, whilst
I appreciate your points, I do not accept them.

But if firms inside EUETS are competing on price with firms outside,
then auctioning gives them a cost burden not borne by their
competitors, preventing the level playing field you are calling for,
and potentially driving their UK operations out of business.

You assume that:

(a) all European companies in sectors covered by the EU-ETS are
protected equally by grandfathering. I recommend you read up about the
impact on Ecocem, an Irish cement manufacturer, who are disadvantaged
relative to their bigger, dirtier competitors by having reduced their
environmental impact before the introduction of the EU-ETS. The same
goes for new entrants. Any mechanism that reduces the competitive
pressure of the threat of new entrants has to be fundamentally wrong
(but very handy if you are an incumbent).

(b) all sectors covered by the EU-ETS are subject to external
competition. In practice, energy supply, which is much the largest
sector, is not subject to significant external competition. The impact
of EU-ETS on industrial consumers does have a negative impact on
competitiveness of those consumers in world markets, but grandfathering
does not necessarily reduce those impacts.

This is just the party line to justify what is really big-business
self-interest (whether you accept/realise it or not). The nature of
EU-ETS is that it only covers big installations. There aren't many small
companies with installations large enough to be covered.

I would also take issue with your conviction that this is a big vs
small debate in CBI membership. There are some large CBI members who
speak up in favour of auctioning in these debates, and equally I get
a lot of lobbying from small energy intensive companies who are
facing crippling rises in energy costs and are hostile to any policy,
such as auctioning, that might add further pressure to energy prices.

If there are two sides to the argument, and various members back
different sides, why did John only highlight one side of that argument?
Why not highlight concerns about both grandfathering and auctioning?

I can believe you have some big members who support auctioning - I have
heard one or two of them in the power sector taking the honourable
position, though it is often couched in reservations. The fact that some
big companies are intellectually honest enough to recognise the
unfairness of the current system does not diminish the fact that its
continuation is in the interests of all businesses (inevitably big
businesses) who receive grandfathered allocations (including the many
who do not support auctioning).

And maybe you do have some small companies arguing for the continuation
of grandfathering because they are worried about their energy prices,
but why do they have the impression that auctioning must inevitably
increase their costs? Even if you ignore the fact that grandfathering
has not shielded them from the impact of EU-ETS, because of the
substantial pass-through of opportunity costs under the current system,
why do they assume that the revenues from auctioning will not be used to
ameliorate the impact on them? Why push for ongoing grandfathering,
which benefits them only indirectly and marginally, rather than direct
assistance, for instance through reduction in other forms of taxation
(or increases in allowances) that affect their costs directly? There is
no inevitability to the assumption that auctioning will increase costs
in the round, so I wonder where these companies got the impression that
there is?

There is a reason that auctioning is the "right approach to emissions
trading under economic theory" (to accept a somewhat suspect
generalisation, but that's another story). Does the CBI now believe that
it is prudent for governments to ignore economics? Will you be promoting
protectionism? How about high "tax and spend" (sorry, I forgot, you
already are, see below)? These policies can also be argued (wrongly) to
benefit the economy, but what economic theory shows, and practice
confirms, is that the cost exceeds the benefits. If you concede the
economic point, you are left with misconceived pragmatism.

If you strip it down to its basics, it is pretty difficult to argue that
grandfathering favours anyone other than those who receive the
grandfathered allowances. If auctioning would increase competition for
the allowances and therefore drive up costs, that is just a reflection
of the fact that some people are currently being excluded from the
carbon market by the grandfathering system. If no one else enters the
system, the overall costs should be the same either way, though they may
be redistributed according to perceptions of future supply of and demand
for EUAs. If auctioning does encourage others to enter the carbon
market, that would simply reflect a correction of an unjustifiable
previous exclusion. That exclusion did not keep overall costs down if
one takes the broader view, it simply ensured that some companies were
favoured by government at the expense of others. It's Bastiat's "what
the eye sees, and what the eye does not see" again. People look at the
beneficiaries of a policy, because they are easy to identify, and ignore
those who are disadvantaged by the same policy, as they are not so
visible. Try Henry Hazlitt's "Economics in One Lesson" for a refresher
course that everyone at the CBI seems to need.

I might be prepared to concede that there is nevertheless a debate to be
had. Oh, but hang on, you forgot to ask any companies like ours to be a
part of that debate in your policy groups. Oops.... I wonder why your
policy prescriptions favour one side of the argument?

we are exploring benchmarking and international sector agreements as
options. I accept these are not elegant policy options, but they
probably give the best chance of combining the economic aim of ETS -
incentivising the most cost-effective carbon abatement - with the
avoidance of compromising parts of the UK manufacturing sector for
no good economic or environmental reason.

I agree that, where costs of carbon-abatement are placed onto European
businesses in globalised markets, the effect is likely to be offshoring
the carbon, rather than any economic or environmental benefit. But that
hardly seems like a good reason to retain the fundamentals of EU-ETS.

Is that an admission of ineffectiveness I hear, when you say that
"benchmarking and international sector agreements...are not elegant
policy options"? If you know your jack is broken, I wouldn't try and use
it to fix your car. How long will it take to get international sector
agreements that are sufficiently all-encompassing to give reassurance to
European manufacturers in the sector? Is it going to be easier to get
agreement to carbon constraints amongst a broader range of nations that
are sufficiently tight not to be pointless, than it is within Europe, or
was at Kyoto? In fact, if you could get international sector agreements,
wouldn't that make EU-ETS defunct? Though it may be well-intentioned,
this is nothing in practice but a delaying tactic. I doubt you'll get
agreement, and if you do, I really doubt it will contain significant
constraints.

How will the benchmarks be set, and if someone comes up with a system
that can make significant carbon savings beyond the benchmark at
marginally greater expense, what incentives would there be for them to
implement that system under a benchmarking approach?

I have to admit, I am not familiar with these proposals, so perhaps
there are answers to my questions. But I wouldn't know, because we are
not part of the debate. And equally, you may not be aware of possible
alternative approaches, as you are not engaging all types of company
equally in your policy process. For instance, I raised the Feasta
proposal with both you (who passed it on to Gillian) and John Cridland.
Has that been circulated for consideration, and if so what did people
think and why haven't you passed their criticisms back to me? I can see
weaknesses in that proposal myself, but are you even considering the
alternatives? Given that I received no follow-up from John to my email
of 7th August that raised this subject, nor from Gillian or yourself
with regard to the promise in your email of 9th September to look into
the Feasta proposal, perhaps you should not be surprised when I get
-very- irritated by the fact that the CBI are still spouting the same
old nonsense, and why I feel excluded from CBI's policy considerations
and can see no point in continued membership of an organisation that
values our money and support a lot more highly than our views.

How does ETS, or indeed your proposed ancillary mechanisms, "incentivise
the most cost-effective carbon abatement"? We all know that the most
cost-effective carbon abatement options are behaviour modification
(drive the car less, turn down the thermostat, turn off the lights, take
fewer or local vacations etc.) and energy-efficiency. And yet personal
consumption is not affected by the scheme, other than through cost
pass-through in the electricity component. How is EU-ETS incentivising
the installation of insulation and double-glazing? Why are savings from
industrial consumption and the production of electricity valued so much
more highly than from heating properties or from flying? A mechanism
that encourages the reduction of carbon emissions attributable to
electricity generation through replacement or modification of power
stations, rather than through reduction of wastage at point of
consumption, is not incentivising cost-effectiveness. It is not as
though a system that did place equal value on these personal savings
would threaten UK competitiveness. And if you want to use the "fuel
poverty" excuse, I am happy to get into that with you, but have a think
about whether it really holds water before you trot that one out.

Shouldn't the CBI, of all organisations, be arguing that industry should
not be asked to shoulder an unfair proportion of the burden of reducing
our emissions? But that is exactly what EU-ETS does.

With the Commission's review of EUETS for Phase 3 under way, we
will be shortly starting work on the technical options for
developing EUETS. I will make sure that the issues you have raised
about EUETS will be flagged up in the staff discussion papers for
this work, and of course along with other interested member you
would be consulted on this.

I was at a meeting this morning with representatives from most of the
big energy companies, and none of them is assuming that EU-ETS will even
survive into Phase 3, let alone have a meaningful value. Phases 1 and 2
have been undermined by political game-playing (on exactly the same
pretext - impacts on competitiveness - that you use to justify the
continuation of grandfathering). And even if anyone believes that there
is the political will inside Europe to tighten the screws, Phase 3 is
post-Kyoto, so no one knows what international arrangements it would be
pegged to, and therefore what would be a reasonable shape for it to take.

This is just one of many reasons why it might be more sensible for the
CBI to argue for a replacement of EU-ETS (an argument I could happily
support). But if you are going to live with a failed mechanism, you
ought at least to be opposing the continuation of its worst feature.

Your offer to take our views into consideration for Phase 3, though
meant well, I'm sure, is a promise of not very much on the never-never,
isn't it? If I discount its value appropriately to the delay and risk,
I'll give you a penny when I see you, and we'll call it quits. Or
perhaps you should pay me.

On the Technology Strategy Board, we support this as a mechanism to
link the £150bn public procurement budget (which like you we would
like to see smaller) with the science the government already funds,
and to start to develop incremental and radical new approaches to
technology and services that actually meet government needs.

What makes you think that government procurement is a suitable customer,
and science research departments are suitable suppliers to each other?
As there can be no meaningful market between the two, how will we ever
know? A hugely expensive experts' board to decide what products of
government-funded research the government should consume, and what
research government should fund, is a proposal that Stalin would have
been proud of. If you don't know his story, look up Trofim Lysenko, and
see how well this sort of approach works. Can't you even smell that this
stinks of communism?

We aren't looking for white elephants, but to accelerate the
development of solutions to real problems, get them
demonstrated, and get them put forward into procurement rounds.

When were white elephants ever portrayed as anything other than attempts
"to accelerate the development of solutions to real problems, get them
demonstrated, and get them put forward into procurement rounds"
(comrade)? People hardly apply for government funding with the declared
objective of building white elephants. That is the natural result, not
the objective, of government thinking that it is better at encouraging
commercial innovation than business is. Lower taxes would be a much more
effective way to encourage diverse innovation that "scratches the itch"
of gaps in the market identified by thousands of different companies.
The fact that you can talk about government "accelerating development of
solutions to real problems" (and spending £625m in the process) shows
that you are very much in the big government camp.

You question why CBI is not advocating a smaller state - in fact this
is a constant theme of our lobbying. Our current work on the
Government's Comprehensive Spending Review has been guided by the
strong member push for CBI to demonstrate how total tax burden can be
reduced and Goverment focus efficiently on the things only it can do.

Let me quote from your web-page
(http://www.cbi.org.uk/ndbs/content.nsf/802737aed3e3420580256706005390ae/e1c8a8378c814930802571e000400927?OpenDocument):

"As part of our lobbying efforts for the CSR07, the CBI will be
publishing its recommendations in the autumn, actively engaging with
government in the interim. On the spending side, the CBI wants the
government to take a tighter grip on public spending growth. While we
would prefer to see this ahead of the three years commencing 2008/09
covered by CSR07, the government must deliver on the promised restraint
covering the CSR07 window. The published CSR07 numbers would see
real-terms spending slow to 1.9% per annum, from an average of 4.8% per
annum real growth over the past five years. Within this spending
envelope we would also like to see a larger proportion of spending
targeted at growth enhancing areas such as transport, skills and
science. At the same time the resources must be utilised more
efficiently than they have in the past. Detailed policy recommendations
will also be published as part of the CBI's submission to government."

That's not calling for a "smaller state". That's agreeing that the state
should continue growing, but at a slower rate. And if you're publishing
this autumn, when will you be consulting your membership? Autumn is
almost over.

I shouldn't have to be making this case to the CBI. I shouldn't be
frustrated by your craven attitude to government intervention. I should
know that the CBI will be making this case automatically, but instead I
know that your words of appeasement to us are not matched by hard
messages sent to the Government. When it reaches the level of you
telling me that black is white ("bigger" means "smaller"), there is
nothing left to say.

The other benefit of discontinuing our membership is that I will not be
tempted to try to preach to the deaf through long communications
expressing our frustration. The value, in terms of time and peace of
mind, of having nothing to do with the CBI is a powerful argument, in
its own right, for leaving. You may feel the same as a recipient of
those communications! There is no good argument for staying.

Cheers,

Bruno

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Subject: Re: [Fwd: The CBI's Weekly Update on Vital Business Issues, Issue 40, Week Ending 03 November 2006]
Date: Thu, 9 Nov 2006 12:11:59 +0000
From: Matthew Farrow
To: Bruno Prior

Bruno,

I think I agree that we are unlikely to persuade eachother so I won't
respond to your points in detail. I would just say in passing my point
about a smaller state was about state share of GDP - there is a strong CBI
line that this must be reduced for all the obvious reasons. And on EUETS,
you are absolutely right that we should be arguing for a bigger share of
the reductions to be made on cost effectiveness grounds by non-industrial
parts of the economy, and we do make this argument constantly (our public
response to the Climate Change Review is one example).

Clearly, though, the decision about membership is one for you and your
colleagues.

Kind regards

Matthew

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Subject: Re: [Fwd: The CBI's Weekly Update on Vital Business Issues, Issue 40, Week Ending 03 November 2006]
Date: Thu, 09 Nov 2006 14:41:32 +0000
From: Bruno Prior
To: Matthew Farrow

Matthew,

Interesting definition of "smaller". Anyway, as I understand it, nominal
GDP growth is estimated to be just under 5% at the moment. Real GDP
growth is estimated to be around 2.6% this year, and around 1.7% last
year, although those figures of course depend on what measure of
inflation you are using (does anyone believe that a CPI figure of 2.3%,
which seems to be used for these purposes, provides a realistic measure
for the economy as a whole?). With a real increase of 1.9% in government
spending, would you like to tell me how long it will take for the
government's share of GDP to retreat to a realistic level, if indeed it
is retreating at all? And after huge year-on-year increases for the past
five years, why would one go so slowly about reeling it in, when the
size of our quangocracy is causing real problems and wastage, and the
huge increases in debt and money supply that have been necessary to
disguise the impact of government-bloat and unfunded promises threatens
the stability of our economy?

With regard to EU-ETS, my colleague Nigel pointed out to me this morning
the comments of the AEP's representative on the Phase 2 discussions:

"I heard in Brussels earlier this week that the Decisions on the first
batch of NAPs (probably the first twelve) are late but should shortly
enter inter-service consultation within the Commission. This points to
publication later this month. A senior DG Tren official noted that only
the UK appeared to have taken the process seriously and there were
considerable problems of over-allocation."

For the CBI to suggest that the main issues with the EU-ETS are its
extension to new sectors and the continuation of grandfathering is
fiddling while Rome burns. And as for your response to the review of the
Climate Change Programme, you proposed that policies target solutions
according to the government's estimates of costs and benefits, rather
than a simple pricing of carbon across the board to allow the most
efficient solutions to be discovered in the market rather than
calculated by government. Does the CBI believe in the market nowadays?

By the way, I feel this exchange of correspondence would be informative
to others, so I will be publishing it on the web in due course. And I
thought it would be a good idea to copy John Cridland and Richard
Lambert on this correspondence, in John's case because his failure to
take account of our views or to provide a forum in which we could
express them is a significant factor in our frustration, and in
Richard's case because he ought to be aware of where the CBI's economic
philosophy has shifted to under the leadership of Digby Jones and Adair
Turner.

Cheers,

Bruno