THE LONDON CONGESTION CHARGE. LESSONS TO BE LEARNED.

 SUCCESS FOR A PRICE BASED APPROACH. BUT ALSO A FEW LESSONS.

The London congestion charge addressed a clear objective, to reduce congestion within the relatively small well defined area of Central London, with an approach that reflected the principles that transport economists had been recommending for decades, congestion pricing. Despite imperfections, it was broadly successful and an important bye-product will have been reduced emissions, both of local pollutants and of CO₂. However the attempt to extend the scheme to a significantly larger area failed to impress, and was abandoned, at least partly because it undermined the gains of the initial scheme. This was the result of an important flaw in its design. We can argue that the exemption of “green” vehicles from the charge may also have been a mistake, in relation both to congestion and environmental objectives.

Traffic congestion is a major factor in increasing both journey times and fuel consumption. Attention has usually focused on the first, the economic cost in terms of the time wasted by travellers and their personal inconvenience. But congestion is also, along with higher vehicle speeds, an important source of preventable fuel consumption and hence vehicle fuel emissions.

The standard economic argument for congestion pricing.

The economic case for road or congestion pricing in general is that as the level of traffic builds up the risk of congestion and delay increases with each additional vehicle coming in to a busy road network. The marginal vehicle, in consequence, as well as facing delays itself, also imposes delays and their consequential costs (in time and fuel) on all the other road users in the network at that time.  The amount of additional delay tends to rise disproportionately faster as the total number of vehicles on the road increases - an important factor. The total cost, possibly amounting to several vehicle/ hours of delay, that an additional incremental user imposes on the population of other users on the road, when this is aggregated over all users, may well exceed the value that the incremental user attaches to their own journey. The argument therefore is that a charge for road use can actually benefit everyone.

Some 40 years after economists had first proposed the idea of road pricing to reduce traffic congestion, London’s first scheme was introduced in 2003. It is widely seen as having been effective in reducing congestion, even though journey times have gradually increased again for other reasons[1], and there has been no serious attempt to get rid of the original scheme. As predicted many road users initially welcomed the introduction of the congestion charge because of the benefit to their own journey times. But the Western Extension was much less successful and was abandoned. This comment considers some of the lessons that can be learned.

Flaws and Limitations

There were a number of ways in which the London scheme deviated from a theoretical ideal. Limitations of technology meant that it was not a full blown road pricing scheme, but a simple per day fixed charge on any vehicle moving within the zone for however short a time or distance. The charge applied during working hours but was otherwise not differentiated by time of day. It was therefore not necessarily closely related to the additional congestion any particular vehicle caused. Also, and most importantly, residents in the congestion zone were themselves exempt from the charge. This was very understandable in selling the scheme politically, but a pure economic logic might have argued that the road was public space and there was no reason for charges to discriminate in favour of residents (free) over non-residents, who often had to travel in to the centre to work. The former were often wealthier than the latter.  But the key point is that the factor of charge-free movement for residents was to prove crucial in the extension of the scheme.

In spite of these practical and political limitations the Central London scheme worked well.  So the Western Extension of the scheme should prima facie have been a relatively simple matter and enjoyed the same degree of success. But a significant mistake was made. The same principle of charge-free movement for residents was applied. But instead of creating two zones, with residents enjoying this privilege only in their own zone, the extension merely created a single zone, thereby doubling the numbers not subject to any charge. Inevitably this weakened the impact on congestion. The extension survived for a few years from 2007 to 2011 and was then abandoned.

The Green Exemption. A confusion of objectives.

I believe that a further weakness of the scheme has been the exemption of qualifying low emissions vehicles. To encourage non-polluting vehicles is a praise-worthy objective. But we need to remember that the scheme was designed to deal with congestion. Returning to the original principles behind congestion charging, any additional vehicle, regardless of its fuel source and emissions characteristics, has the potential to add significantly to the journey time of all the other vehicles on the road, the great majority of which will be higher fuel consumption and higher emissions vehicles. It will then undermine both the original economic objective of relieving congestion and reducing travel time, and also the further objective of reducing pollution.

Eventually, if electric or other zero pollution vehicles become the norm, the traffic congestion objective will be lost altogether.

And what lessons should be drawn.

An earlier comment in this blog noted the effectiveness of relatively simple measures of regulation in the transport sector.  This comment notes the success of an economist’s more market and price based approach to rationing the scarce commodity of road space. But the real lessons perhaps are the importance that other policies, eg other lifestyle choices or for land use, can have as an incidental impact for a low carbon objective. In this case we are talking about congestion, but speed is another clear example in the transport sector. The lesson is clear. Rigorous analysis, and focus on objectives, are especially important for market based approaches to transport, and to escape (as far as possible) the law of unforeseen consequences.

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[1] These include factors such as traffic calming measures, pedestrianisation, and increasing population and demand for travel. It is hard to evaluate the counterfactual, what would have happened but for ….

EIGHT ECONOMISTS. BREXIT AND CLIMATE.

EURO SCEPTIC, SCIENCE SCEPTIC.  MORE CORRELATIONS ?

Eight economists for Brexit have today published a pamphlet on the economic case for leaving the EU.  I suggested in an earlier comment that at the political level there was a strong correlation between Brexit and climate scepticism.  That correlation is obviously strongly in evidence in the economic fraternity as well. (Yes it is a fraternity, at least for the eight.)

Of the eight, three have strong institutional or personal connections to the climate sceptic position, one as a former adviser to Nigel Lawson (Brexit and GWPF), one as adviser to Boris Johnson, and one with the Institute of Economic Affairs (IEA). The IEA has for a long time been exercised by the threat that climate change realities (and the EU) might pose to small state and free market ideologies.

Of the others, Tim Congdon once claimed that “… the EU bureaucracy has accepted the so-called ‘warmist’ doctrine that, … mankind is largely to blame for the warming of recent decades.” 195 countries have just signed up to this strange notion in Paris, and it is a notion that  is shared by every serious academy of science and meteorological organisation in the world. Never mind.

I am not familiar with Neil McKinnon, but an economist Neil McKinnon has written somewhat less temperately on the subject in the Scotsman: “ …there can be little doubt that this country has taken one more step closer to a state of green fascist insanity….”  In this instance the charge is laid against Holyrood, not Brussels. [Apologies to both if this a namesake, and I will publish your comment.]

Patrick Minford may be out of the mainstream in terms of Europe (according to the FT), but does not appear to have strong views on climate. Perhaps his absence from the sceptic camp reflects his time as an adviser to Mrs Thatcher, a politician who famously was one of the early politicians to “get” climate change, according to Sir John Houghton, first chairman of the IPCC. Likewise the last two do not feature strongly in the climate policy debate.

It seems to me to be quite tragic that ideology should dominate the climate debate. I hope it is not doing that for Europe. With or without Brexit, everyone will be facing difficult questions in the light of the Paris agreement.

MARKETS, REGULATION AND INNOVATION IN ROAD TRANSPORT

REGULATION OF VEHICLE EFFICIENCY IN THE US

This is intended to be the first of a number of short comments on road transport and its potential contribution to environmental objectives. These  will look at the different instruments by which we seek to control carbon emissions and the respective roles of markets, regulation, and innovation. These are not mutually exclusive but usually complementary.  As we contemplate just how we will meet the ambitious targets of Paris (COP 21), experience to date in the road transport sector has some important lessons. This comment focuses on a measure of how effective relatively simple regulatory measures can be. The chosen example is a historical one - US regulation to reduce road fuel consumption after the oil crises of the 1970s, and the impact of an anti-environmental backlash in the mid 1980s. It demonstrates both the impact of policy measures, and of course also the cost of policy mistakes.

Managing problems in road transport

One standard market economics response to dealing with "externalities", of industries or products that have serious side effects or adverse consequences for society as a whole, is to try to capture at least some of the externality by imposing taxes that penalise the polluters, thereby internalising this cost for the industry, and providing incentives both for innovation and reduced use. There is no doubt that prices generally can work in the way we expect they would, reducing demand for the commodity that is being more highly priced or taxed.

One illustration of the long term influence of prices is the claim that the US became accustomed to enjoyment of much larger and less efficient passenger vehicles because its gasolene prices were so low, although the primary reason for this was not environmental per se but because the US had never used road fuel taxes as a revenue raiser in the way that European countries have. More generally there are plenty of examples of economies, like Germany, which are competitive and productive in spite of high energy prices.  High energy prices force high levels of energy efficiency.

But prices and energy efficiency are not the whole story, and transport has plenty of other interesting lessons for us. The other problem areas of road transport are in health and safety, with road accident casualties and air pollution, and in the economic and personal costs of traffic congestion. These are also economic externalities, but our approach to them is often through regulation. We do not rely on taxation to control vehicle speeds, nor in general do we try to create markets in speed. Instead we have speed limits. Similarly we tend to rely on regulation not markets to protect air quality.

Congestion is a different story. The first London  mayor, paradoxically (for some) an avowed socialist, introduced a form of “market” solution in the form of  a congestion charge. A later comment will address some of the successes and shortcomings of those particular schemes, but in essence he was implementing a form of road pricing that transport economists had been recommending for decades.

CAFE Regulations in the US. Showing the effect of regulation

The US responded to the oil crises of the 1970s by subjecting the vehicle industry to quite stringent regulations, the Corporate Average Fuel Economy (CAFE) standards, to improve energy efficiency and the fuel economy of vehicles . It is an interesting observation in itself that the US did not choose to rely on the "market" approach of gasoline taxes as its primary instrument to deal with the perceived threats to US energy security. Instead it relied  on subjecting the vehicle industry to quite stringent regulations to improve energy efficiency.

I have chosen this example because its effects were well documented by Lutsey and Sperling,  with the particularly easy to follow graphical representation shown above.

As the authors say, there was a strongly positive and relatively constant rate of improvement from 1975. This is clear for both their measure of technical energy efficiency, ton-miles per gallon, and for vehicle fuel economy, miles per gallon. In fact until the mid 1980s the rates of improvement in both moved in close correlation.

But during the mid 1980s, an anti-environmental backlash resulted in a major change. Innovation allowed continued technical improvement, but the trend in vehicle fuel economy stalled. Robert Kennedy was able to claim in 2001 that “The CAFE standards worked so well that they produced an oil glut by 1986. That's when the Reagan administration intervened to rescue America's domestic oil industry from gasoline price collapse. Ronald Reagan's rollback of CAFE standards caused America, in that year, to double oil imports from the Persian Gulf nations …."  [NY Times.24 November 2001]

After 1986 technical efficiency continued to improve but the gains were realised, not in vehicle economy but in heavier vehicles, and, among other factors, more power and better acceleration. Prices have at most a limited role to play in this story. This was not a market failure but a policy choice. To quote Lutsey and Sperling, the benefits of technological innovation were used to satisfy private desires (power, size and amenity) rather than the public interest ( fuel security and lower greenhouse gas emissions). 

Ironically the US retained a national maximum speed limit of 55 mph, a rather low number by international  standards, until 1995. Both speed and congestion are major influences on fuel consumption.

THE EU REFERENDUM AND ENERGY POLICY. A LIGHT BULB MOMENT.

There was a lighter moment in the UK referendum campaign last week, when well-known energy and climate expert Liz Hurley announced that she would be voting to leave the EU because she could no longer buy one of her favourite light bulbs.  This, it appeared, was all down to the EU’s insistence on prohibiting sale of the said bulbs. The story was given substantial prominence in the British press, notably in papers with a history of antipathy towards both the EU and climate science.

The story was spoiled somewhat when a spokesman for Hilary Benn revealed that Mr Benn himself had been personally responsible for the voluntary agreement in the UK to phase out the energy guzzling lightbulbs. “Ms Hurley appears to be in the dark on climate change policies. It was Britain that led efforts to reduce carbon emissions across Europe, including by encouraging more energy-efficient lightbulbs in the UK before the EU law was agreed.”

My source for the above quote is Joy Lo Dico [Evening Standard, 22^nd April] but I have yet to find this clarification published in the papers that splashed the original story. Of course that would spoil the neat equation of European attacks on British sovereignty with the evils of attempting to take effective action to save the planet. But lurking behind these trivialities there are some serious questions.

What is the right balance between the EU and national governments for regulation and market initiatives related to energy and climate?  A believer in free trade ought to be arguing that a wider market, in emissions quotas for example, is essential for economic efficiency and ultimately benefits us all. On the other hand the EU emissions trading scheme has failed to live up to its early promise, and that is one of the reasons why so many national policies exist alongside the EU measures.

I shall try to return to some of these questions, which will also become prominent in follow-ups to the Paris agreements, during the course of the referendum campaign.

PARIS CLIMATE AGREEMENT. COP 21 SETS AN AGENDA.

AFTER THE PARIS SUMMIT (COP 21). CHALLENGES FOR TECHNOLOGY, ENERGY POLICY AND EVERYONE?

Adrian Gault, Chief Economist at the Committee on Climate Change, addressed the BIEE’s regular energy and climate policy seminar this week. His presentation will be available to BIEE members on the BIEE website, and this note reflects both his presentation and some of the subsequent discussion at the meeting. (These meetings are held under the Chatham House Rule, with no attribution of opinions allowed. This comment however reflects both the meeting and this author’s personal observations on conclusions to be drawn from Adrian’s presentation and the subsequent discussion.)

Aim for temperatures well below 2^oC above pre-industrial levels. Get to rapid reductions from peak as soon as possible. Try to lower risk with a 1.5^oC. limit.

The December negotiations in Paris should be viewed as a success for international climate diplomacy. The level of ambition for effective action, and the aim of reducing the “2^oC limit” to an even more challenging if aspirational 1.5^oC was both surprising and encouraging.  The UK can claim that its current approaches are entirely compatible with Paris, but there will nevertheless be important challenges for the EU as a whole, for the UK in supporting key technologies such as carbon capture, and globally in ensuring adherence to the principles set down in Paris. This was an event that will interact with every aspect of our politics, from regulation and markets through to trade deals after a possible “Brexit”, for a very long time.

Paris 2015 was anticipated as a “make or break” event for concerted international action on climate, and should be viewed as a success, even if it fell short of the negotiated imposition of “top down” national climate targets that some were demanding. Instead it is a strategy based on national commitments, but with a process of monitoring, review and verification (MRV) that allows for a tightening of requirements (to reduce GHG) over time.

Given the difficulty of enforcing binding commitments in any case, this may well be a more robust strategy. The growing evidence of the risks posed by climate change, sharpened by this year’s record temperatures, will expose backsliders to a considerable volume of criticism, and will be hard to separate from other international negotiations, eg over trade. But there is no doubt that the tasks will be extremely challenging, even for countries like the UK which are relatively well equipped in institutional terms for the task in hand.

The CCC’s advice to the Secretary of State in January recognised that the Paris agreement was more demanding for the long term than current UK targets assume, but nevertheless that its earlier recommendations for the fifth carbon budget, covering 2028-2032, should be retained, although tighter budgets may be needed in the future. The measures underpinning this budget appear to be consistent with a cost effective approach to the 2050 target (the CCC’s formal remit) and also with more ambitious commitment by the EU in the light of Paris.

But it is clear that longer term targets will require this, and the UK’s overall strategy, to be kept under review. The UK government has already responded positively to the agreement by acknowledging the profound implications of Paris, promising "to take the step of enshrining the Paris commitment to net zero emissions in UK law".

A number of particular questions arise in this context, particularly for a number of the technologies required for cost-effective progress towards “zero carbon”.

·         Both CCC analysis and that of the Energy Technologies Institute (ETI) has indicated the importance of carbon capture and storage (CCS) technology in providing a cost-effective route to a low carbon future. Unfortunately support for this was cancelled in November 2015, and will now need to be reconsidered.

·         Aiming for “zero carbon” requires some energy technology which is “carbon negative”. The only serious contender for this currently is bio-energy with carbon capture (BECCS), which was discussed in my earlier comment (20^th April) on the benefits of wood burning at Drax. This could have been an early demonstration of BECCS.

·         Cost-effective low carbon scenarios also face some difficult choices in the heat sector, some of which are discussed under the DECARBONISING HEAT tab on this site. The CCC already recognise the heat sector as having potentially the slowest rate of reduction in carbon emissions.    

·         Pushing ahead faster on the transport sector is another priority.  This is a sector where considerable weight attaches to regulatory measures to encourage electric or other potentially low carbon technologies.

·         Consistency with current or revised EU targets in the context of the EU’s flagship emissions trading scheme

The discussion also reverted to the familiar debate on the relative merits of regulation and markets, and whether tighter targets might tilt the balance back towards regulation. In many respects this may be a false dichotomy, but the weight to be given to each instrument will be a continuing theme.

One participant referred to the “elephant in the room” – the possibility of a Leave result in the EU referendum, and its effect on the political landscape. The very strong correlation between “Leave” and opposition to climate focused policies[1] would imply very difficult times ahead, on both UK climate policies and on future trade negotiations, either with the EU or others. It would be hard to see the EU, or many countries outside the EU, accepting trade deals which exempted the UK from emissions policies to which they had themselves signed up.

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[1] This blog. Anti-Europe and Anti-Science, 28^th March 2016

WOOD BURNING GENERATION AT DRAX. A GREEN SUBSIDY?

A GOOD DEAL BUT COULD DO BETTER?

Pilita Clarke in the FT of 19^th April (yesterday) discusses fuel burn at Drax, and the offer of Britain’s largest power station, and biggest emitter of carbon dioxide, to reduce emissions in exchange for continuing subsidy.  The figures are interesting. If we can assume with confidence that the wood pellets imported from the US are indeed carbon neutral, admittedly a big assumption, then this looks like a good value short term fix to reduce UK carbon emissions. But the story does not end there. If the biofuel supply provision can be made to work in an environmentally friendly (ie carbon neutral) way, Drax could be at the forefront of UK efforts to move towards a “net zero” carbon economy, something that the Government has promised in the wake of Paris.

At full output Drax is capable of burning nearly 10 million tonnes of coal a year.  Very approximately this is likely to equate to about 25 million tonnes of CO2 emissions. If the FT figures are correct, and with a few other significant assumptions, then the 2015 subsidy, if it relates to 50% of Drax output, may have reduced UK emissions by around 12.5 million tonnes at a cost of around £450 million.  In other words the implied cost of CO2 reduction is about £36/ tonne.

This is prima facie below even relatively conservative estimates of the long term damage caused by carbon emissions, for example those published in the 2011 Treasury guidelines, and looks to be below most estimates of the carbon price at which alternatives such as nuclear energy become viable on a long term perspective (ignoring for the moment the trials of Hinckley Point). So prima facie this looks like a good deal and a sensible deployment by the government of its own cost benefit analysis.

But the bigger picture is also important. Post Paris, the government committed to a zero carbon strategy for the long term.  De facto this implies a substantial removal of CO2 from the atmosphere, and the only viable route to this currently on the horizon is the burning of biomass, as at Drax, combined with carbon capture (CCS). 

Prior to the November cancellation, itself a contravention of the government’s election promises, of funding for CCS, Drax had been engaged in substantial planning to deploy carbon capture and construct a pipeline for its eventual storage in the North Sea. Those plans are now on hold. In terms of current prices, CCS requires additional primary energy input, so the notional cost of CO2 sequestration will rise above the £36/ tonne quoted above.  But then so will the urgency of CO2 sequestration, and our collective willingness to pay.

EXTRA STRONG EL NINO CONTINUES TO DELIVER RECORD TEMPERATURES

RECORD GLOBAL TEMPERATURES PERSIST IN MARCH. BUT ARE WE ALSO STARTING TO SEE WIDER IMPACTS?

Two of the three most significant meteorological organisations have now reported on the average global temperatures recorded for March 2016, once again breaking previous records by a big margin. The chart shows the results presented by the Japanese Meteorological Agency (JMA), but the continuing dramatic surge above the ongoing upward trend has since been confirmed by results published by NASA, one of the other two acknowledged sources of meteorological data.

The graphical presentation below, which can be viewed on the JMA and other sites, shows the above trend nature of March 2016 in particularly stark form, and highlights just why climate scientists have been surprised by the scale of this sudden leap in global temperature.

The El Nino effect

The short term leap reflects an unusually strong el Nino event, one of the strongest on record, and of a very similar scale to the 1998 el Nino effect which also caused a temporary leap in average global temperature.  Comparison of the two events can be found in an FT report of 18^th April 2016, which indicates that the 1998 event was rather stronger on composite measures and about the same in terms of temperature alone, as compared to 2016.

A moment of truth for the sceptics?

Global warming and climate change sceptics have placed a heavy weight on the supposed halt to or hiatus in warming since 1998. Choosing the “outlier” 1998 as the base year was always a somewhat specious statistical argument, considering the relentless upward climb in the underlying trend, but it looks as if the current el Nino gives us the chance to compare temperatures between two very similar el Ninos. The result is a very strong upward gradient between 1998 and 2016, if anything exceeding most estimates of the underlying trend.

Of course it is most probable that we shall in the next few years see a reversion to the underlying upward trend. It rarely pays to exaggerate the significance of a single observations or even of a single year. But if we do not see some falling back, then we should be very concerned that climate science has seriously underestimated the risks we face.

Why are the numbers subject to this kind of volatility in the first place?

Given that the basic mechanism of warming is well understood in scientific terms, one might expect that it could be simply described in terms of the effect of a more or less constant net heat gain for the planet from solar irradiance, until a new thermal balance was reached. However there are a number of reasons why the reported results might be more volatile than this implies. First there may be some natural variation in solar radiation,eg related to the sunspot cycle. Second the earth has chaotic weather systems, which also have some influence on the amount of heat the earth absorbs in any given period.

But the biggest issue is probably that of measurement. Measuring surface temperatures, which is essentially what the regular global temperature measures are, is really only covering about 10% of the additional heat content. Perhaps 90% is to be found in the oceans. What el Nino does is to stir up the balance, temporarily, so that more of that heat is to be found in the atmosphere.

And the human impacts may be getting serious too.

We are also now seeing a stream of reports on climate impacts. It may be hard to relate these directly to anthropogenic climate change but they do illustrate the scale of importance of even quite small perturbations in climate.

One is coral bleaching. El Nino and the general trend to warming sea waters are posing a serious threat to the Australian Great Barrier Reef, a World Heritage Site, and probably the greatest natural draw for the Australian tourist industry.

A new NASA study claims that the recent drought that began in 1998 in the eastern Mediterranean Levant region, which comprises Cyprus, Israel, Jordan, Lebanon, Palestine, Syria, and Turkey, is probably the worst drought in the past nine centuries. It would be wrong to suggest that this caused the civil war in Syria, with regional rivalries, external interference and other factors as the biggest driving factors. Water shortages and domestic unrest over the allocation of water rights were however one of the proximate triggers for the uprising, a prime indication of the possible political and human consequences of climate.

On a more optimistic note another NASA study finds a strong link between climate changes and wine harvests, noting the possibility that warmer summers can improve the grape harvest and the quality of the wine in France and Switzerland.

QUESTIONS FOR NATIONAL CLIMATE POLICIES POST PARIS

AGREEMENT ON CLIMATE ACTION. NOW FOR THE HARD PART.

There is no doubt that the December climate conference in Paris was a diplomatic success, at least from the perspective of anyone concerned about the risks of excessive greenhouse gases (GHG) and climate change.  That includes all the world’s major governments and national academies of science, as well as environmental groups.  It was however just the start, the first of many necessary but not sufficient steps to achieve the goals of reconciling lifestyles and a sustainable planet. We can already anticipate some very difficult questions that will need to be addressed in the coming months and years. The UK and EU have particular perspectives, but many of the challenges will be universal.

Legally binding and ambitious but dependent on national efforts.

Did the Paris climate conference (COP21) achieve a meaningful legally binding agreement across the international community? Certainly the EU felt able to assert  that “195 countries adopted the first-ever universal, legally binding global climate deal”.  And the aim to limit temperature increase to 1.5°C, or at least to have a goal well below 2°C above pre-industrial levels, in order  to significantly reduce risks and impacts of climate change, is commendably ambitious.  It is also close to the boundaries of credibility, given that we are already at 1.5°C, with some further increase “baked in” even if human emissions of GHG were to cease tomorrow.

It also recognised the need for global emissions to peak as soon as possible, and to undertake rapid reductions thereafter in accordance with the best available science.  In practical terms the ambitions of Paris imply movement, over a relatively short timescale, to a zero net emissions economy, or “net zero”.

The agreement fell short of the legally binding national targets for which many had hoped. In terms of political realities this was clearly a step too far at this stage, so responsibility for achievement is decentralised to national climate action plans along the lines of the Intended Nationally Determined Contributions (INDCs) submitted prior to Paris. The provisions for transparency, reporting and review are however likely to put considerable pressure on national governments to live up to the spirit of the agreement.

The implications of zero net carbon

The technical implications of zero net carbon is that there will be a substantial need for technologies that are negative emission in that they result in actual net extraction of CO₂ from the atmosphere. Currently there are two possible means to do this. The first is use of biomass in power stations, combined with carbon capture. This is in essence attempting to enhance the natural carbon cycle so that it leads to net absorption of CO₂.  UK progress with this has not been helped by the cancellation of CCS funding.

The second is the even more ambitious sequestration of CO₂ directly from the atmosphere.  This is theoretically possible but no cost effective technology currently exists to do it. Myles Allen, with a logic independent of the chosen target approach used in Paris, also arrives at the conclusion that the development of this technology is a priority. “Massive carbon capture investment needed to slow global warming.” Others will see it as a vital backstop against policy failure or against the possibility that climate and other science has seriously underestimated the impacts of even 1.5°C or 2°C warming.

Big Policy Issues for the EU and UK

The UK is already committed to an 80% reduction by 2050. Speaking in the Commons, energy minister Andrea Leadsom said government believed it was necessary "to take the step of enshrining the Paris commitment to net zero emissions in UK law". However in terms of delivery the UK is struggling to build the first new nuclear plant, and the government has recently cancelled CCS funding – a technology of fundamental importance in relation to meeting its 2050 targets at a reasonable cost, let alone “net zero”.

Meanwhile the EU is still struggling to make sense of its emissions trading scheme, the EU ETS.  This, the EU’s flagship policy, has been an administrative and technical success, but a conspicuous failure in terms of its ability to produce a carbon price that incentivises long term low carbon investment. However the EU is widely seen as sticking doggedly to “pure” market solutions when what may now be implied by Paris is a much heavier component of direct policy intervention and regulation.

Unsurprisingly this is one of many areas where there will be competing claims for EU and national policies and priorities. Post Paris, one question is whether future “national” INDCs relate to Europe or the nation states. And that is before we even begin to consider the repercussions of the UK referendum.

The BIEE run five seminars each year on different aspects of energy and climate policy.  The next one takes place on 20th April, with Adrian Gault, Chief Economist at the Committee on Climate Change (CCC), talking about post Paris implications for the UK.  The seminar is open to all, but registration in advance is required, and closes on Friday 15^th April.  Details may be found on the BIEE site at: http://www.biee.org/meetings/

CARBON EMISSIONS. IS THE ECONOMICS LOSING CONTACT WITH THE PHYSICS?

CUMULATIVE CARBON TARGETS. WE NEED TO RE-THINK THE POLICY IMPLICATIONS.

April 2016 

This subject is receiving increasing attention in the aftermath of Paris, and the importance of cumulative carbon and the notion of a global carbon budget, recognised in the earlier essay (below 2008) and in the OIES working paper on this subject, is increasingly accepted. The debate is however moving on.

For that reason I am restating, on a separate page, some of the basic ideas and discussing how they fit with current thinking. You can also access this more technical article via the navigation bar at the top. The article covers  the fundamental arguments and questions, following the logic of the paper I presented at the 2012 BIEE Academic Conference.

Carbon dioxide (CO2) emissions are essentially cumulative in the earth's atmosphere.  The thesis of what follows here is that much economic analysis and policy making in relation to the mitigation of CO₂ emissions has failed to reflect fully this essential element of the science. 

In particular the cumulative and irreversible nature of CO₂ necessarily implies that a significantly heavier weight should attach to current as opposed to future emissions.  This is in major contrast to some conventional wisdom and also to the outcomes and expectations that can be observed from current application of market-based approaches to limiting carbon emissions.  Application of a progressive tightening  of “carbon caps” – limits on total CO₂ emissions -  has tended to deliver a very different message on the relative importance of present and future emissions, with the price of current emissions being very low, but with a prospect of rapid rises in the future. 

This inconsistency in time profiles, between a focus on costs or externalities – the social cost of carbon (SCC), and the market price outcome from an emissions cap approach, has the potential to create major distortions in policy and is likely to have seriously sub-optimal results.  Similar criticisms could be levelled at policies focused too closely on individual year targets rather than cumulative emissions.  Policy making needs to redress this imbalance.  Recognition of the cumulative nature of CO2 should strengthen the case for urgency and also lead to more recognition of the option value of early action on emissions.

Some of the implications of these straightforward principles are of direct and compelling importance in relation to major policy issues, such as gas for coal substitution in the power sector, the inclusion of aviation within the EU ETS, and the choice of carbon capture and storage technologies. At a minimum the implications need to be better reflected in guidance on the valuation of emissions for public policy purposes.

TIME FOR A REALITY CHECK ON UK ENERGY PRICES

DON'T BLAME BRUSSELS AND DON'T BLAME CLIMATE POLICIES

Few topics compete with industrial energy prices for the level of misleading information and analysis they generate. The reality is that energy prices are rarely decisive in determining an industry's ability to compete, UK power prices in particular are high by international and European standards, but this has little to with Green climate policies and even less with Green policies imposed from Brussels. It may well reflect other issues in the way we have chosen to run our power sector. These deserve critical examination in any case.

Brussels attitude to energy intensive industry

David Buchan of OIES has commented on my blog on the UK steel issue, drawing attention to the link with Brexit arguments. His comment is worth repeating. "It is misleading to blame the EU for high energy costs related to renewable energy subsidies, when the UK’s own Climate Change act mandates more ambitious emission reductions than EU legislation, and to suggest that Brussels does not allow the UK to offset the extra cost of clean energy policies for energy-intensive industries."

David goes on “The Commission is keen to keep energy-intensive industries in Europe for the carbon leakage reasons you give”. It makes good sense, as I argued earlier, to encourage energy intensive industries towards countries capable of providing low carbon energy supply; currently this does not include China or Germany or India.

Moreover the Committee on Climate Change notes that “steel producers face EU ETS costs for their direct use of fossil fuels. However, they also receive a free allocation of allowances under the EU ETS and estimates suggest this has more than covered that direct cost”.

If Brussels is to be faulted it is for its failure to deal with German behaviour (contravening the spirit of a competitive internal market) or with Chinese dumping. According to the FT’s correspondent, [Kiran Stacy, 3 April 2016], “Germany has handed over 40 times more in energy subsidies to heavy industry since 2013 than the UK, highlighting one reason why British steelmakers are in such trouble.” Whether a UK outside the EU, and not part of any other trading bloc, could have made a better job of handling unfair competition from Germany, or the dumping of steel by China, is a very different question.

But how much do energy prices matter to industry anyway?

Industry lobbying suggests energy costs are a major factor in competitiveness, and one would expect this to be true a fortiori for steel.  But the same FT article quotes research from the Committee on Climate Change indicating that energy accounts for just 6 per cent of all the costs of running a blast furnace, and other evidence that it is about 5 to 10 per cent of production costs. In this instance it seems that, notwithstanding German subsidies to energy costs, it is other factors, mainly the very low price of steel, and dumping, that are the main problem for the steel industry.

One other macro-economic factor, not often mentioned in the debate, is the exchange rate. This is likely to be much more important than energy costs, since it relates to a much higher proportion of total costs, including labour and other domestic economy related costs, including much of the content of the energy costs themselves.

More deep rooted causes for high UK energy costs.

A historical perspective is useful and there are plenty of data sources. The International Energy Agency publication, Energy Prices and Taxes, gives a long annual series of prices for EU and other IEA countries. This international price comparison provides a useful historical perspective. In 1989, the last year the UK electricity sector was in public ownership, UK industrial electricity prices (excluding taxes) were about 7% above the IEA median and 20% lower than those in Germany. They were 25% higher than in rapidly decarbonising France.  By 2007 UK prices had climbed to be 42% above the IEA median, 15% higher than Germany, and 50 % higher than France. UK prices. 2007 was the last full year before the UK’s 2008 Climate Act, so the increase cannot be attributed to excessive zeal in reducing emissions.   By 2014, the UK was 44% above the IEA median, 58% above Germany, and 50% higher than France.

International comparisons are notoriously difficult, and a number of obvious explanations suggest themselves. These include the possibility of subsidies and cross subsidies in the German power sector, the de facto artificially low exchange rate that Germany enjoys within the Eurozone, and special factors such as shale gas impacting prices in North America.  The figures also reflect the very different fuel mixes in the IEA, France benefiting very obviously from nuclear power. And of course there may be many other factors, including geographical endowments, differences in reliability standards, and forms of ownership with different demands for a return on capital employed.

It is however rather disappointing that the UK should appear to be doing so badly, given its leadership role in the market liberalisations of the 1990s, and the exceptionalism that is sometimes claimed for the performance of UK liberalised markets. There is however little or no evidence that zeal in pursuing climate policies is a major factor, and none that European policies on emissions trading have had any impact at all.

CLIMATE MILESTONES POINT TO A TROUBLED FUTURE FOR COAL AND OIL (AND GAS) INVESTMENT.

Three significant events in the last fortnight point towards a sea change in the way that investment markets will increasingly look at fossil fuels. The first is just a headline. Even oil barons are giving up on fossil fuels. The second is a new report by the US National Academies of Sciences, Engineering, and Medicine. This draws much stronger connections between climate change and the frequency of extreme weather events, something that notoriously cautious scientists have hitherto been reluctant to claim with confidence. The third is a straightforward analysis from the Oxford Martin School of facts and figures on carbon emissions, pointing out the risk to any new investment in fossil fuel power generation without carbon capture. It is a “stark warning … on the probability that ‘2°C capital stock’ will be reached in 2017.”

Rockefeller charity takes ethical stance on fossil fuels

The Rockefeller Family Fund, the charitable vehicle of one part of the family, announced last month that it would be divesting its shares in coal producers and oil and gas explorers, including ExxonMobil, today’s of the Rockefeller money machine, Standard Oil. This is a repudiation of the fossil fuels that were the foundation of the family fortunes. By itself the action of a single charitable organisation may appear of limited consequence, but as an indicator of future investor sentiment, it will be symbolic.  For reasons unconnected with ethical principle, other serious investment funds, including pension funds are also taking a long hard look at the impact of climate concerns, and the risk to long term investments which may be forced to close before the end of their “economic” life.  The reasons relate to the second and third of our recent events. [see FT’s US investment correspondent, Stephen Foley, 3 April 2016]

Responsibility for extreme climate related events

The second news item, the US National Academies Report, is important for its potential political impact. It explores the controversial question of event attribution due to the impact of climate change. Nick Butler [FT, 28 March]  asks whether events such as the 2003 Paris heatwave (killing 3,000), floods on the Somerset levels in in the winter of 2013/14, or the wildfires of western Russia in 2010 (killing 56,000) can be confidently attributed to climate change. The report suggests that at least for some extreme events, notably heat, there is a causal connection. It is not the first such attribution. Myles Allen of the University of Oxford was the first to propose the use of Probabilistic Event Attribution to quantify the contribution of human influences on climate to specific individual weather events.

For some physicists and engineers this may merely confirm an instinctive intuition that complex systems with more energy (ie heat) will tend to be more chaotic, and the report remains quite cautious and nuanced. But the tendency to ignore climate change, as a far distant phenomenon that need not concern us now, will be weakened if locally catastrophic impacts start to be seen as immediate. As Butler says, if the linkages become more obvious, the public demand for action will grow.

He adds: “In politics, if a risk cannot easily be removed or managed the temptation is to look for someone to blame. In legal terms this will be translated into the concept of liabilities. If you are a shareholder in an energy business you might like to ask your company’s view of the issue.” As a practical matter, legal liabilities for climate change may seem rather hard to establish, but I would not underestimate the abilities of US law firms in this area. It is certainly another question for investors.

New fossil fuel plants for power generation will turn into stranded assets

The third event is a report from the Oxford Martin School, by Professor Cameron Hepburn and others, that reiterates the observation that we are uncomfortably close to the point where the world’s energy system commits the planet to exceeding the carbon budget for emissions consistent with a “safe” climate change target of 2°C increase. The report goes on to argue that, even on quite favourable assumptions for other sectors, any new fossil generating plant built after 2017 will, unless it allows for carbon capture and given the longevity of power plant, commit us to exceeding the global budget.

So if we actually propose to take the Paris agreements seriously, and if we do not then we face the prospect of a dangerously uncertain global future, we need to recognise that any such plant will need to be retired well before the end of what investors would normally consider to be its economic life. In other words it would be a stranded asset.

There are many qualifications that might be added to what are inevitably broad brush projections. The assumptions may be too optimistic, both on greenhouse gas reduction in other sectors, or on the degree of “safety” provided by the notional carbon budget. Other, older, fossil plant (without CCS) might be retired earlier. And allowing for a carbon capture retrofit introduces a loophole.

But the general direction of travel is clear.  “Far from having years to work out how to curb the risks of climate change, we face a moment of truth.” [Martin Wolf, FT, 5 April 2016].  The regulatory and policy risk for new fossil plant will be huge, and such plant depends on revenue guarantees over periods of up to 30 or 40 years. This will be a really serious concern for investors and make the investments much harder to finance at any realistic cost of capital.

Nor can the owners of the stranded assets expect much sympathy. To quote a colleague, “surely the sight of stranded assets will be seen as a sign of successful climate policy”. 

(re-published on the Oxford Martin School website)