Saturday, April 2, 2016
NEED TO LIMIT CLIMATE CHANGE SHOULD MAKE A CASE FOR UK STEEL
There is a strong strategic case for the UK to continue steel production, not least because it has the capacity to show a lower future carbon footprint than its competitors. There would be a strong case now, if all steel producers were obliged to reflect the costs of climate damage. But it would be strengthened immeasurably if the UK proceeded with plans for carbon capture and storage (CCS) where we have, in the North Sea and our oil industry expertise, a natural comparative advantage.
In a rational economic world, competition and free trade are supposed to ensure that we produce what we want and need at the lowest possible cost. Unfortunately that is not the world in which we live. Most of the world’s national steel producers, including China and Germany, find ways to protect their own industries. Even more important is the distortion caused when none of them are obliged to factor in the huge damage and possible catastrophe that CO2 emissions are inflicting or will inflict on our climate. This threat was recognised in words though not in actions at the Paris summit, and emphasised by the record global temperatures observed in February 2016.
The rapidly growing urgency of action to curb carbon emissions means that any rational economic analysis ought to give a huge comparative advantage to retaining energy intensive industry in countries which are able to provide low carbon power and low carbon industrial processes. With this perspective how do some of the other major steel producers stack up?
China, although it recognises the gravity of its situation in relation to climate, and is building large numbers of nuclear reactors, is still, for the foreseeable future, an economy heavily dependent on coal – the worst form of fossil fuel.
Germany, despite its Green pretensions, has set its face against both nuclear power and carbon capture, the two most important technologies for rapid baseload deployment in a low carbon economy. It continues to commission new coal stations without CCS. Energy cross subsidies to German industry are a long running concern for fair competition in Europe, and German industry benefits further from the artificially low de facto exchange rate that Germany enjoys within the Eurozone.
The UK has a potential advantage in terms of lower coal dependence. But this would be magnified many times over if we proceeded with plans for a CCS network. It is therefore doubly unfortunate that the government should have cancelled its funding of CCS projects in November 2015.
Even this is not the whole story. Politicians and industry lobbyists prefer to concentrate on relative energy prices rather than exchange rates, although the latter are often an order of magnitude more important than the former. The UK currently runs a record deficit on current account, making the current valuation of sterling ever more dependent on the “kindness of strangers”, to quote the Governor of the Bank of England. Losing a steel industry will only add to that, increasing the likelihood that any major shock, like the risk of Brexit, will provoke a sudden slide in the currency, which might of course make UK steel competitive again. But by then of course it may be too late.