COP27. REPARATIONS AND CLEAN DEVELOPMENT

Historic guilt and reparations are a hard sell, for obvious reasons, but self-interest points in the same direction. But aid will have to be consistent with climate-related objectives.

 

COP27 has just ended, and the failure to do better on targets for phasing out fossil fuels will be widely regarded by many as a possibly disastrous failure for humanity. Its most substantial success appears to have been in recognition of the necessary financial transfers from rich nations to poorer ones. Even this, however, faces some serious headwinds in implementation, based, as it has been, on the linked concepts of “reparations” and “historic responsibility”. Neither will be straightforward.

 

Beginning with historic responsibility, this should clearly be a measure of cumulative emissions, but there are multiple hard to resolve questions. One is, in a world of international trade, whether responsibility lies with the country where the fossil resource was extracted, where it was refined or converted, the domicile of the owners of energy industries or their bankers, or where the final products were consumed. In other words is it producers or consumers who are responsible? In a world of complex supply chains, this is problematic.

 

A second question, for the legitimate assignment of responsibility, is to choose an appropriate starting date from which to measure cumulative emissions? The date matters a lot in terms of assigning responsibility, particularly for the relative contribution of China and India. 

 

1992 was the year of the first earth summit in Rio de Janeiro, which led to the establishment of the United Nations Framework Convention on Climate Change (UNFCCC).  1990 was the baseline chosen for the Kyoto Protocol targets. So it equates, approximately, to the time when the climate science began to offer irrefutable evidence of the causes and dangers of unmitigated climate change, and their recognition by governments.  

 

Arguments that measurement should start from earliest recorded history ignore the uncomfortable truth that energy use, especially via electricity, is responsible not just for economic growth but for most of the positive features of the modern world, including science and medicine, as well as its problems. Without those advances in science and measurement we would not even be aware of the problem we have.

 

As difficult as measuring historic responsibility is the assignment of moral responsibility, at the level of the nation state, for historic events. Apart from factors such as migration, are individuals really responsible for their nation’s past? And what responsibility do we assign for current and past population growth, the elephant in the room for political discussions, but a prime cause for a substantial part of actual emissions growth over recent decades, as well as “baked in” future emissions? 

 

Finally a massive share of responsibility for current atmospheric concentrations rests with those parties, governments (most notably of fossil-rich states), businesses, other vested interests, and individuals, who have sought to subvert and delay effective action. Few of them are volunteering to make “reparations”. In the case of businesses, the feasibility of extracting compensatory sums on any scale is low or negligible.

 

For all these reasons the terminology of reparations and historic guilt will make transfers a hard sell politically in the developed world, and even more so given perceptions of energy and financial inequality even within that world.  A more easily justifiable and politically more saleable argument for financial transfers from rich to poor, though, should be simple self-interest. 

 

We are facing the increasing likelihood, post COP27, that targets for cumulative emissions consistent with a liveable human environment will not be met, and the only remedy left will be direct extraction of carbon from the atmosphere.  Inevitably the only parties capable of mustering the financial resources for this are the same wealthy nations called upon to pay for “loss and damage”. 

 

But viewed in cost benefit or cost effectiveness terms, the promotion of clean development will almost always prove to be much cheaper than having to pay for direct air carbon capture (DACC), the ultimate fall-back as climate change becomes an existential threat. A good example is provided by the theoretical case for financial support of rural electrification to limit use of charcoal and firewood, a major source of both emissions and environmental degradation across developing economies, and the subject of a previous post. This is easily justified in global cost benefit terms, but of course with a global externality like CO2 emissions, the benefits are global, but the costs local.

 

What this means is that there is a clear self-interest for the wealthiest countries to provide financial support for clean development. Of course it also means that donors will want to ensure that support is directed towards climate related objectives, and not seen simply as a payment in compensation for loss and damage. This could have major implications for the governance and direction of any new dedicated fund, as donors will demand a say in how funds are spent, but the likely outcome is perhaps that there will be relatively few specific alterations to processes and priorities due to “loss and damage” per se.

The massive tasks of mobilising aid and finance for mitigation, adaptation and clean development, much of which is “behind the scenes”, should, and indeed must, continue.

 

HIDING IN PLAIN SIGHT: THE RISE OF STATE COORDINATION AND THE DECLINE OF RELIANCE ON MARKETS

A long term theme in this blog has been the exploration of markets and governance in the power sector. For most of the last 30 years the dominant paradigm, largely controlling public debate, has been an idealised model of competitive markets, private ownership, and the complete absence of any form of state planning. The UK was for a long time seen as the exemplar, the model that Brussels encouraged other EU countries to pursue, and a model that was promoted by the World Bank in its work in developing economies.

 

The reality has been somewhat different. In practice many EU countries, most notably France, were extremely reluctant to follow the UK model. The World Bank has become much more sceptical of the value of its privatisation mantra. There have been catastrophic failures in some of the exemplars of this neoliberal model, such as ERCOT in Texas. In the UK, although lip service has continued to be paid to the market ideal, the pendulum has swung back to more and more emphasis on state coordination and almost every aspect of investment decision taking in generation has been heavily influenced by government, whether through guaranteed feed-in tariffs or underwriting of long term contracts.

 

There are many reasons for this gradual reversion to a historical norm, in which the sector is dominated by vertically integrated and regulated monopolies, public or private, and requiring careful coordination. These include:

·      the imperatives for a low carbon economy, and the absence of adequate market signals to drive that

·      the fact that low carbon generation is not really compatible with the kind of market rules that were appropriate to fossil generation 

·      the close coordination required in low carbon systems to ensure both a balanced mix of investment and efficient and reliable operation

·      conventional financing issues around infrastructure and long-lived assets

·      perceived failures of reliance purely on markets to deliver acceptable outcomes

 

The result, however, has been the rise of state coordination and the decline of reliance on markets. This theme is explored in a recent piece by myself and Jose Maria Valenzuela, which, for the next 50 days or so, can be reached via the link below.

 

Jose has injected a social science perspective, and we combined partly as a result of our mutual collaboration in the Oxford Martin School Integrate programme. An interesting reminder for economists was the observation that monetarism persisted for so long because early failures were interpreted as success. Similar factors were evident in the energy sector.

 

https://authors.elsevier.com/a/1g6Qe7tZ6ZxRYB

 

Energy Research & Social Science. December 2022, 

 

THE CASE FOR ELECTRIC VEHICLES IS STRONG ENOUGH TO SURVIVE ATTACKS FROM THE ICE LOBBYISTS

ICE: The acronym for Internal Combustion Engine

 

A new report appeared earlier this month, commissioned by the APPG “Fair Fuel” lobby group. I dissected the group’s previous 2021 report in a previous blog[1], focusing particularly on the group’s demonstrably absurd claims that the cost of the additional power generation infrastructure for EVs “would bankrupt UK plc”.

 

The new report, commissioned from the Centre for Economic and Business Research (CEBR), is superficially a more professional analysis, but similarly lacks balance and objectivity. It makes a series of claims regarding the costs and benefits associated with following current UK government policy, to phase out purchase of internal combustion (ICE) vehicles, and allow only battery only electric cars (BEV) by 2030/2035[2], which it describes as the “alternative case”. This is compared in a cost benefit analysis (CBA) with a “base case”, which corresponds to a much slower movement to full electrification, and achieving quite limited electrification by 2050.

 

CBA techniques are, in practice, much better suited to looking at comparatively marginal or incremental choices within a relatively self-contained and well-defined context, where most of the parameters are well established or easily estimated. For big policy choices that play out over long periods, and where few of the relevant parameters can be easily estimated with confidence, there is a risk of extreme dependence on unverifiable guesswork, at best, or simply deliberate insertion of numbers that fit the prejudices of what the sponsors want to hear, at worst.

 

The CEBR report illustrates these problems well. Specifically, the very large numbers assumed on costs do not align with the findings of the highly respected and authoritative Committee on Climate Change.[3] At best they often seem to represent assumptions rather than careful analysis.

 

The key CBA estimates in the CEBR report, comparing the government’s 2030 policy with the APPG base case, for the full period 2023 to 2050, are (in £ billion):

……………………………………………..

 

Benefits:                                                                                                        

 

Reduced CO₂ emissions in driving                                    64.7                                                               

Health benefits of reduced emissions                               11.2                

 

Costs

 

Extra costs of purchasing BEVs                                        187.8              

Extra fuel costs of EVs                                                        34.9                                                                          

Cost of extra CO₂ emissions in manufacture                      32.5                                           

Waiting time costs                                                               46.5                

Extra infrastructure costs                                                    98.5                

 

……………………………………………

 

These assumptions all deserve a few brief comments.

 

Extra costs of purchasing BEVs. New vehicle prices are set at 2022 levels. The extra cost, and hence the EV price premium for car owners, is therefore assumed to remain unchanged to 2050. This is an outstanding example of the twin intellectual fallacies of assuming no technical progress, and ignoring other factors, notably economies of scale in BEV production, and market or economic pressures and trends. 

 

In contrast a 2021 study by BloombergNEF[4] predicts inter alia that new battery prices will fall by 58% between 2020 and 2030, and that for light vehicles, electric will be cheaper than ICE vehicles by 2027. They add that the growth in EV sales is no longer being driven primarily by policy, but by organic factors, ie consumer preferences. Other analysts have predicted earlier parity with ICE vehicles. Arbitrary assertion of a nearly 200 billion cost penalty is simply perverse, and casts doubt on the quality of the CEBR analysis as a whole. This line item might more realistically appear as a further benefit to current policy rather than a massive cost.

 

Cost of extra CO₂ emissions in manufacture. A recent review[5] of studies on this subject, by the International Council on Clean Transportation (ICCT), provides an excellent summary. It reveals a wide, factor-of-five, range of estimates for emissions in manufacture, reflecting different battery chemistries and other factors. A major factor in this type of lifecycle analysis is the extent to which the power sector has been decarbonised. The ICCT review indicates that emissions in production, as with direct production costs, are expected to fall dramatically, not just with power sector decarbonisation, but with improved battery development and recycling techniques. The CEBR report does not appear to take account of these factors.

 

Infrastructure costs. This covers additional generation, network infrastructure, and EV charging points, not broken down in the CEBR report, which can challenged on several points. First, National Grid has elsewhere suggested 6 GW additional capacity (with smart charging), not the 19-26 GW (without smart charging) indicated in the CEBR report[6]. This cost will in any case be financed through what drivers pay through their electricity tariff, already implicitly covered in the calculation of running cost saving. Second much of the distribution network infrastructure is already overdue for replacement or upgrading; this is required inter alia to accommodate heat pumps. A typical view of most distribution engineers is that, at the installation stage, the incremental cost of additional network capacity, the number relevant to a CBA, is very small in relation to the total. 

 

That leaves charging infrastructure per se. Another ICCT report[7], based on projections for the 100 most populous metropolitan areas in the USA, suggests infrastructure costs of less than $1000 per new EV, falling as the number rises. While the UK might have higher installation costs, the US figure is dominated by home charging, suggesting lower average costs likely in the UK.

 

Taken together these arguments suggest the CEBR estimate of additional infrastructure costs is hugely overstated.

 

Health benefits.  A recent Oxford University report[8] estimated current (2018) annual health costs of £ 6 bn per annum, attributable to vehicle emissions (not just CO₂). Prima facie this suggests a much higher health benefit than the CEBR estimate of £ 11 billlion for the period to 2050.

 

Extra fuel costs (excluding CO2 externalities). This appears to have been calculated by looking at cost savings to the motorist and, quite correctly, subtracting the tax element to reflect the fact that this is a transfer payment not a resource cost or societal benefit. However overall the Committee on Climate Change takes a different view[9] on future fuel costs and estimates a real resource saving for the UK[10]. Moreover oil prices have recently risen substantially and may remain high.[11] 

An important technical point in a CBA is that the tariff price EV drivers pay per kWh considerably exceeds the true incremental cost of generation, as it includes a very high proportion of shared and fixed network costs. So this too is merely a transfer payment which serves to understate the resource or societal benefit of switching to EVs. Again the implication is that the report is seriously overstating costs.

 

Waiting time costs. It seems unlikely that waiting times on this scale will persist with improved infrastructure, or as drivers adjust to EV ownership. I am not aware of any other analysis which has considered this to be a major issue. Again this figure seems to be based on hypothesis rather than evidence or analysis.

 

Using a 2050 cut-off point

 

A major conceptual flaw in the analysis is the 2050 cut-off point.  The base case and the alternative emphatically do not lead to the same state of the world (or UK) in 2050.  In the base case the UK continues to have 50 million tonnes per annum of CO₂ emissions, shown in the report as reducing very slowly. In the alternative case UK has an (almost) fit for purpose vehicle fleet in 2050, (almost) compatible with net zero objectives. In effect this implies the creation of a valuable capital asset, worth about £ 10 billion per annum for some years after 2050 (using the CEBR’s own estimates). This should be included in any CBA analysis.

 

The alternative case would also mean the UK was at least making the necessary contribution to the minimum reductions required for global climate objectives. If all countries fell short in this and other sectors to a similar degree, then the prospects for safeguarding future climate health and prosperity would disappear. 

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[1] http://co2economics.blogspot.com/2021/08/costing-electric-vehicle-future-ignore.html

[2] 2035 relates to the end date for plug-in hybrid vehicles (PHEV)

[3] https://www.theccc.org.uk/wp-content/uploads/2020/12/The-Sixth-Carbon-Budget-The-UKs-path-to-Net-Zero.pdf

[4] https://about.bnef.com/electric-vehicle-outlook/

 

[5] https://theicct.org/sites/default/files/publications/EV-life-cycle-GHG_ICCT-Briefing_09022018_vF.pdf

[6] However the report does not repeat the gross errors other 2021 report which estimated generation infrstrucure at £ 1.5 trillion

[7] https://theicct.org/sites/default/files/publications/ICCT_EV_Charging_Cost_20190813.pdf. 

 

[8] https://www.ox.ac.uk/news/2018-06-06-pollution-cars-and-vans-costs-£6billion-year-health-damages

[9] I have not yet been able to check this claim.

[10] Although we should of course note that the real resource cost in Russia or the Middle East may be much lower than that

[11] It’s worth noting that the prices importers pay may be considerably in excess of the real resource costs of extraction in the Middle East or elsewhere.  So in a global CBA context, some different conclusions might be drawn.

“WORST MACRO-ECONOMIC POLICIES OF ANY MAJOR COUNTRY IN A LONG TIME”

Pretty poor on the energy policy front too. And levelling up is no longer even on the agenda.

 

Today’s mini-budget deserves a quick comment in this blog, not least because of the close connections with energy issues. 

 

Let’s begin with a few quotes

 

Paul Johnson, Director of the Institute for Fiscal Studies, said: 

“Today, the Chancellor announced the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up. Instead, the plan seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth.”

FT Robert Shrimsley described it as “…  a stunning repudiation of the economic strategy of the last two Tory premiers …” and  its “dismissal of the central importance of sound public finances” as a rejection of core Conservative principles.

 

The UK is "pursuing the worst macroeconomic policies of any major country in a long time" says former US Treasury chief Larry Summers.

………………….

 

Why it is likely to fail in its own objectives

Governments cannot mandate growth; if they could we would not be worrying about it now. GDP growth would already be with us.

 

·      Under the right conditions a fiscal stimulus can boost GDP, but tax giveaways to the wealthy are among the least effective polices as wealthy people have a higher propensity to save rather than spend. They also have a higher propensity to spend on imports and to spend on foreign holidays.

·      Purely in macro-economic terms, a fiscal stimulus that benefits lower incomes is more likely to stimulate spending.

·      The economy already has severe supply side constraints, especially evident in labour shortages. But the apparent pursuit of a trade war with Europe will simply make things worse, and reduce our economic potential further.

·      Unfunded tax cuts will simply increase the risks of further currency devaluation (with sterling already 2% lower today), and inflation.

………………..

 

Energy matters too

The crisis in gas prices, and possibly in supply adequacy, matters for two immediate reasons:

 

·      affordability of energy, particularly for the poor and vulnerable.

·      sufficient gas to meet demand and “keep the lights on”.

 

A blanket subsidy for energy prices is an inefficient means of protecting the vulnerable, with a high cost for only very limited protection. The sensible strategy would have been much more targeted support, either through social security, or, better still, through so-called “rising block” tariffs which allow initial tranches of supply at a much lower price, but with a higher price for higher levels of consumption, which provides a bigger incentive to avoid waste. This would also be more consistent with net-zero objectives for the sector.

 

The practicalities of this are not helped by the many dysfunctional features of a “quasi-competitive” energy market. 

 

Finally passing up the opportunity for at least some level of windfall taxation in the sector has merely added to the already extreme macro-economic risks that we face.

MEETING THE ENERGY PRICE CHALLENGE WITHOUT BANKRUPTING THE UK ECONOMY

Readers will have to excuse my long lay-off from posting comments on energy and climate. This has been only partly due to diversions –  storage issues in the context of a forthcoming Royal Society report, reading up on “solar refinery” technology, and collaboration with an Oxford colleague in reviewing the failure of the neo-liberal consensus on electricity markets.

But it’s also partly due to the fact that much of what I write has been about alerts to the dangers of climate change and the importance of action. The last year has seen much more emphasis on these issues in the mainstream media. But with a new government stuffed with climate science denial, I fear there will be more to write about.

 

………………………

 

MEETING THE ENERGY PRICE CHALLENGE WITHOUT BANKRUPTING THE UK ECONOMY

 

The UK now faces multiple, closely linked, economic and energy challenges:

·   poor economic performance, manifested in low growth and falls in real incomes

·   the highest inflation since the 1980s (when Mrs Thatcher was PM) 

·   escalating prices for gas, which dominates the cost of both heating and power generation in the UK

·   managing the UK role in transition to a global low carbon economy 

 

Poor economic performance and inflation are among the worst in the G20[1]. While many factors contribute to this, it is at least partly driven by the trade and cost issues resulting from Brexit. The OECD says the UK is unique in simultaneously grappling with high inflation, rising interest rates and increasing taxes.

 

But today’s immediate issue is managing the massive escalation in gas prices. There is a real risk that, in politics as elsewhere, the urgent drives out the important. In this case the crisis of fuel affordability, undeniably important, risks diverting us, at least temporarily, from what is in the long run a much more serious challenge, the existential crisis of climate change.

 

Gas prices are obviously driven, in the short term at least, by events in Russia and Ukraine. But there were already reasons to suppose that the previous disconnect, between low prices in Europe and much higher prices in the Far East, would not be sustained indefinitely. It would be a mistake therefore to imagine that gas prices will eventually revert to the low levels to which we had become accustomed. This immediately casts a shadow over what appear to be the new PM’s policy choices to deal with the crisis – a blanket freeze on prices, paid for by borrowing which will be paid back by future consumers through higher bills over (perhaps) the next twenty years. If fuel prices are not going to drop any time soon, this seems foolish.

 

First we need to dismiss the fallacy that today’s global energy crisis is a clean energy crisis.

This is an absurd claim. To quote Fatih Birol, Executive Director of the International Energy Agency:

“I talk to energy policymakers all the time and none of them complains of relying too much on clean energy. On the contrary, they wish they had more. They regret not moving faster to build solar and wind plants, to improve the energy efficiency of buildings and vehicles or to extend the lifetime of nuclear plants.”[2]

 

The government’s renewed interest in fracking is therefore an irrelevant diversion, an observation I made in a post in 2019, quoting the views of professionals in the gas sector.[3] Its near term impact would be trivial.

 

So what would a good strategy look like.

 

Trying to insulate all consumers from any impact of the rising price of gas is both impossibly expensive and potentially encourages wasteful use of an increasingly scarce resource. Among other objections it would involve a cross-subsidy from taxpayers as a whole to some of the wealthiest citizens who are also high users of energy. Targeting those most in need of help ought to be one of the objectives

A good practical strategy that avoids excessive expenditure might involve a multi-faceted solution which includes measures along the following lines:

 

·   capping fuel prices at current levels for households, but only for a limited level of consumption per household. For electricity this might be the first 1000 or 1500 kWh in a year.

·   high levels of usage would pay something much closer to full cost (this could of course be done in steps)

·   paying for that support partly through windfall taxes, to reduce the impact on public expenditure. 

·   simultaneously encouraging reduced energy usage, particular examples being reduced levels of heating in public buildings, and unnecessary illumination of office buildings at night.

·   some additional targeted support for vulnerable households through the social security system.

·   some additional targeted support for sectors of business most at risk, although it will be hard to separate small business problems from the impact of the expected recession..

 

No solution is likely to be perfect. There will be plenty of special cases, for example in households locked into electric heating. Some poor households will be high consumers, and some wealthy people low consumers.

 

But at least this is an approach that stands a chance of being affordable, given the other strains on the public purse. 

 

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[1] GDP – International Comparisons: Key Economic Indicators. House of Commons library

[2] Writing this week  in FT of 5 September

[3] http://co2economics.blogspot.com/2019/11/fracking-was-never-sensible-choice-for.html