FINANCIAL CRISIS AND CLIMATE

Will the urgent drive out the important?

The slowdown in the global economy will slow the growth of energy consumption and give some limited relief to the apparently inexorable rise in global emissions. The consequential reduction in the need for electrical capacity should also cause the UK government to pause before permitting a go-ahead with a new coal burning plant at Kingsnorth.


But will engineering the economics of recovery also deflect attention from the equally urgent and arguably even more important long term tasks of limiting man-made climate change and avoiding catastrophic long term consequences? The tribulations of recession are real, large and immediate, but they may seem small in comparison with the costs that have to be borne if we fail to limit man-made climate change.The answer to this challenge is surely to make the best possible use of the opportunities that arise. For countries that have decided or are able to contribute a fiscal stimulus, expenditure can be steered to a high priority on CO2 reducing projects. Countries that are fiscally challenged and are forced to raise taxes should concentrate on "green" taxes. Properly designed, such taxes should be seen as reducing an economic distortion, encouraging the wasteful use of energy, and hence as more beneficial than many other taxes.


An ambiguous role for markets and prices


There is a paradox in the approach of many commentators and economists to energy policy for climate change, and this has been reflected in the approach taken by the UK government.

• On the one hand, the approach is to promote the role of markets and market derived prices in promoting large scale low carbon investments, where they are patently struggling to deliver, often because of well identified market failures including weaknesses in the design of the market structures. xxxxxxxxxxxx
• At the same time policy is usually excessively cautious about use of the price mechanism in approaches which would ensure that the social costs of carbon, the "externalities", would be more fully reflected into consumer prices, a measure which, however unpopular, is demonstrably capable of having an effect on energy consumption and waste.

The UK led the way in the reform of new market structures for the energy utilities. Competitive market structures have many advantages over nationalised monopolies, but prima facie they also severely limit the policy instruments open to Government. The question we now have to face is whether those market structures are still fit for purpose in a world where an almost overriding policy importance should attach to creating an energy sector compatible with a global climate change agenda. Two facts are abundantly clear.

• when fundamental security and stability issues are at stake, as is the case with climate issues, Governments can no more stand aside from energy markets than they can from the failures of financial markets


• some energy markets, including the critically important power generation sector, have built-in elements of market failure in respects that are particularly serious in trying to promote investment in low carbon futures; they need reform, and intervention may be required to achieve necessary and targeted reductions