Wednesday, March 8, 2017


House of Lords Select Committee on Economic Affairs. The Price of Power. Reforming the Electricity Market. February 2017.                                                            

Perhaps the most controversial element of the Committee’s report lies in those of its recommendations which would have the effect of downgrading the sustainability objective aimed at reducing UK emissions. Whether the Committee might have felt emboldened by the election of climate sceptic Donald Trump, or the success of the Brexit campaign[1], will no doubt be a matter for political scientists to discuss. A degree of comfort to climate sceptics might even be considered ironic, given the current House of Lords stance in relation to the triggering of Article 50.  What is more disturbing is the absence of any serious evidence or analysis in the report to justify such a major change of stance in relation to the “energy trilemma” of sustainability, affordability and security. Ultimately these choices are indeed partly economic, especially in the affordability/ security trade-off, but the main issues in relation to sustainability have become essentially ethical and political, involving as they do, inter alia, considerations of intergenerational equity.

The Committee began with the intention of examining market failure in the power sector. Inadequate means to reflect into actual costs and prices the irreversible environmental damage of CO2 emissions, the “social cost of carbon” externality, is arguably the biggest market failure of all by a significant margin. A number of those giving evidence[2] drew attention to the issue, but the Committee nevertheless proposes a downgrading of the importance of the corresponding policy objective. It does this without solid argument, and perhaps more importantly without having taken much evidence relevant to a comparative assessment of the urgency attaching to climate objectives. In global terms this includes both growing scientific concern with climate change as an existential threat (eg over Arctic ice), and growing political acceptance of the need for urgent action as manifested, despite its shortcomings, in the Paris agreement.

The Committee has preferred instead to retreat to the letter of the 2008 Act and the 2050 target, arguing for a slower pace of emissions reduction towards that single year target. This in itself is somewhat disingenuous, given that attachment to arbitrary target dates is criticised elsewhere in the report. It is a rather obvious truth[3] that the real objective in reducing emissions has to relate primarily to cumulative carbon dioxide in the atmosphere, not to an annual emissions figure for an arbitrary year. Inter alia this tends to imply that current emissions reduction should be valued even more highly than future reductions.

The proposal that the pathway to 2050 can be back-end loaded is beguilingly simple but in reality is very misleading.  A globally back-end loaded reduction profile implies substantially higher cumulative emissions, and earlier and bigger climate impacts. Early reduction in emissions in contrast has substantial options value in postponing by several years both cumulative CO2 and climate milestones, as well as the need to spend large sums on adapting to adverse consequences of climate change[4]. In each case this means more time to address the most difficult parts of the emissions reduction problem (eg aviation) and the unknowns associated with adapting to impacts of climate change.

The Committee’s proposal has therefore the potential to be extremely damaging, at least to the UK’s contribution to climate change mitigation, and, if copied elsewhere, on a global scale. The only defence for this position that can be inferred from the report’s approach is that because the UK remains a small contributor to global emissions (c. 3%), it should therefore be willing to free ride on the efforts of others. This is hardly a principled position. The Committee has made itself a cheerleader for those parts of the energy industries that hope if they can postpone effective action for long enough then the problem will go away. It won’t.

Overall, and despite some useful content and evidence, this is a disappointing report, failing to recognise a number of changing paradigms both in the nature of the electricity sector and in the global environmental challenge. But on the key issue of sustainability it is a shortsighted and retrogressive attempt to downgrade the most fundamental challenges for energy policy, the growing existential threats of unmitigated carbon emissions and climate change.

[1] Ideological leanings and demographics may play a strong role in determining views on both climate issues and Europe.  CLIMATE CHANGE AND POLITICAL STEREOTYPES   
[2] For example in the submission by Professor Hepburn and his colleagues.
[3] The arguments, for anyone not familiar with them, are spelled out on another page of this blog, CUMULATIVE CARBON.
[4] Fuller discussion on this topic can also be found in the author’s earlier paper. Cumulative Carbon Emissions And Climate Change: Has The Economics Of Climate Policies Lost Contact With The Physics?, John Rhys, OIES Working Paper EV 57, July 2011.

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