Friday, November 3, 2017
That is one thesis of Dieter Helm’s latest report for the UK government, a review of the cost of energy. Helm attempts to bring some rigorous economic analysis to economic and environmental policy that has often appeared to consist largely of ad hoc patches and “initiatives”. However the report has attracted criticism, notably from Richard Black, Director of the Energy and Climate Intelligence Unit, who argues that the report is lacking on evidence, even on such simple questions as the actual extent of energy price increases, or whether the UK really is seriously out of line with other European countries.
One particular criticism appears to hit home, the accusation that Helm has simply cherry picked the data, using 2004 as a base year, even though it was characterised by unusually low energy prices. This, Black claims, is the kind of dishonest twisting of evidence practised by climate policy sceptics such as Lawson and the Global Warming Policy Foundation (whose work is addressed on another page). However the broader divide is between Helm, who, like many economists, has a strong preference for more direct carbon pricing approaches, and Black, who argues that in an imperfect world, we should be more prepared to accept a “mixed” approach.
There are other nuances. Black attempts to link Helm with Lawson, both having been significant witnesses in front of the House of Lords Select Committee, whose rather inadequate report appeared earlier this year. This seems unfair to Helm. I have commented before on the weaknesses of the Select Committee report but Helm has little in common with Lawson’ refusal to accept the evidence and logic for warming provided by climate science.
It’s worth making a number of points on the general subject of energy prices and carbon taxes and their place in relation to climate policy. Regular readers of blog will have heard some of these arguments before, so please excuse the repetition.
First, the exchange rate is a much more important driver of international competitiveness than energy. Significantly we have heard very little about industrial energy prices since the Brexit induced fall in sterling. In part this may be because Brexit is a much more serious existential threat to the UK economy, but mainly it will be because the UK comparative position will now look much better.
Second, economists rightly stress the virtues of a rational approach which far prefers a transparent carbon tax or price to ad hoc policy interventions that can have unfortunate or even perverse consequences. However, as Black clearly feels, the real world is sometimes more complicated. The truth is that the EU ETS, the only international carbon pricing mechanism to which we currently have access, has been a dismal failure, not producing a realistic carbon price, and again this has been the subject of earlier commentary. Unsurprisingly most member states have adopted additional measures in a similar manner to the UK.
Third, if the UK were to adopt carbon taxes at a level that reflected the long term social, environmental and long term damage, it would need to be fairly substantial. A figure of £100/tonne of CO2, for example, which is well above most estimates of the point at which baseload nuclear becomes economic, but well below any estimate of the carbon sequestration from the atmosphere, would add nearly 4p/kWh to the unit price of electricity generation (given the current mix). This is if anything rather higher than the cost of current policies.
This should help us put the issue in perspective. It is of course true that recovery of public policy costs through utility prices is an unsatisfactory way of doing things. As we may see, in future comments, it is an approach that becomes unsustainable in a world where, increasingly, customers can try to escape this form of “tax” through their own generation. But that is an interesting subject for another day.