A PAY-PER-MILE TAX JUST FOR ELECTRIC VEHICLES. SURELY NOT?

 One of the ideas being floated for the budget is the imposition of a pay-per-mile tax for driving on UK roads. The immediate motive for this is the growing realisation that revenues to HM Treasury from fuel tax will shrink rapidly as electric cars replace the internal combustion engine.

 

However current proposals, including those from the Resolution Foundation, suggest that the charge, of perhaps 3p per mile, should apply only to electric vehicles and not to internal combustion engine (ICE) vehicles.  I cannot think of anything that would be better calculated to destroy Labour's credentials as a party committed to environmental protection and public health. The international reputation of the UK on climate matters would similarly be demolished, if it were to sabotage what has hitherto been one of the more promising and successful planks in its raft of low carbon policies (after decarbonisation of the power sector).

 

It's worth starting with a simple observation on the current level of fuel duty, frozen since 2011. There is a general principle of sensible taxation for products or activities that cause widespread damage to society. Where the damage is general and a realistic measures and estimates can be made, so-called Pigovian taxes, sometimes described as “sin” taxes, should at least equal the estimated cost to society of the damage done. Otherwise, consumers are not covering the costs of the damage they inflict. If they were obliged to do so, they would tend to consume less of the product, and we would be collectively better off; in this case they would be more likely to switch to low carbon alternatives, hydrogen or electric vehicles.

 

Surprisingly, for ICE fuels, we do have a number that we can use.  Treasury Guidance, which supposedly provides a basis for UK public policy and project appraisal, sets a cost/value to be placed on CO2 emissions/savings. It was set at £265 per tonne of CO2e for 2022. The implication of this is that fuel duty should be set at somewhere around 60p per litre or higher, simply to compensate for the emissions for which it is responsible. For ICE fuels, the current level of fuel duty is 52.95p per litre; in other words ICE vehicles are not paying the true societal costs of the fuel they use.

 

Incidentally this analysis excludes the health costs of urban pollution from ICE vehicles. This is a similar order of magnitude, and is already recognised in London with ULEZ. There are plenty of studies that do cost the health effects, and the numbers are large. So the growing use of electric vehicles is overwhelmingly in the public interest, whether from a national or a global perspective.

 

There are a few rather specious excuses for the proposal to levy pay-per-mile charges on EVs. The main one is that they tend to be heavier, like for like, and may therefore incur higher road maintenance costs. Apart from the fact that the UK sensibly and rarely hypothecates taxes in this way (duties on wines and spirits are not used to subsidise pubs or off-licences), there are two responses that demolish this argument. One is that the relative impact of EVs, compared to large commercial vehicles, or to other factors like weather, that impact on roads is firly insignificant. The other is that if this really were a serious issue we should already be imposing differential weight-based charges on ICE vehicles as well

 

Purely from a climate or public finance perspective, there should not necessarily be any objections in principle to the introduction of pay-per-mile. Road use charging is potentially just one more method of revenue raising, with the advantage that it is to some degree related to an infrastructure cost, with the disadvantage of being quite hard to implement effectively. Like any tax it will also be examined for its wider impacts. But if introduced these taxes should apply to all vehicles, in order to retain the incentive for cleaner vehicles, whether hydrogen or EVs.

 

But if we do introduce charges per mile, we should go all the way to a proper system of road pricing, charging only for the most heavily used and congested routes. This would alleviate city congestion, save time and money, and, while we still have mostly ICE vehicles, would also reduce pollution and improve health outcomes.

 

Perhaps most importantly, imposing a tax specifically targeted at EVs, after a long period when governments have been actively encouraging their purchase, would destroy the credibility of future incentives that governments may wish to use in pursuit of their policies. Such a loss of trust in the consistency and stability of future economic incentives would not be confined to the energy sector or to zero carbon issues.

 

Carbon Capture. Getting behind the hysteria.

Carbon capture is in the news again, as the new Labour government announces a substantial new programme for the development of the technology. This has attracted a barrage of criticism from both Left and Right, in spite of the fact that carbon capture is widely regarded as an essential component of any mitigation strategy. So it’s worth exploring a bit further.

 

Some technical background.

 

We should get the terminology clear. There are many approaches to carbon capture, including the use of natural processes in the carbon cycle, for example by improved land use, planting trees or through various “geo-engineering” schemes to increase the “fixing” of the carbon in the oceans.  Greens and others, unsurprisingly, tend to favour the most “natural” and least environmentally intrusive of these. 

 

Second, when CO₂ is captured, it can either find a useful purpose, or it can be sent to a safe permanent store. Use in the soft drinks industry will be trivially small, but it can also be used in the production of synthetic fuels. Most recently there has been a lot of interest in synthetic aviation fuel (SAF) for the hard-to-decarbonise aviation industry.

 

Trees are one form of direct atmospheric carbon capture (DACC). But there are also industrial process approaches to direct capture, sometimes referred to as mechanical trees, which rely on established chemical techniques to separate CO₂  from the atmosphere. It’s claimed that the cost of DACC and subsequent storage (DACC+S) could be brought down to below $200/ tonne, a level that could imply total costs of emission-free oil use well within the historical range of oil price variations. Proposed options for storage include geological formations such as depleted oil reservoirs  and the deep oceans

 

Problems with and arguments against the various DACC methods include:

 

·       excessive requirement for land use, sometimes in competition with food production; this will apply to some but not all methods of both a “natural” and industrial nature; this places an upper limit on what they can achieve

·       excessive land use can also have ecological and human rights implications

·       unproven nature and potentially high costs, and, in the case of natural methods, science unknowns around whether particular land-use policies will be net emitters or receivers of CO₂

·       for industrial methods, high energy use requirements

·       the argument that carbon capture is a distraction from the preferred alternative of eliminating fossil fuels

·       in relation to storage, doubts about suitability of locations, safety and permanence; transport of CO₂and injection into storage may also be expensive

 

The above has all been about direct air capture. However it is, for obvious reasons, likely to be much easier and cheaper to capture high concentrations of CO₂  at the point of combustion when it is released from the fossil fuel. A Green version of this technique involves the use of sustainable bio-fuels, known as bio-energy carbon capture and storage or BECCS. BECCS is likely to be severely supply limited in relation to the scale of what is needed. More generally carbon capture can be fitted or retro-fitted to fossil burning plant, including power generation, and this has generally been the main focus of carbon capture and storage policies, usually referred to as CCS.

 

An additional issue for CCS is that it is likely to be less than 100% effective, with a leakage rate of perhaps 10% or more, so it is not a silver bullet.

 

Is carbon capture an essential component of climate strategies?

 

The IPCC is fairly clear that carbon removal, ie DACC, will be an essential component of any feasible route to a sustainable future. It also endorses continued use of fossil fuels, where this is accompanied by CCS, as one of the options for getting to a net zero future. CCS is also supported by the UK Committee on Climate Change (CCC) as part of a UK strategy aimed at this objective. Both these bodies have the advantage of access to a huge body of scientific and technical advice on the subject, in the context of means to mitigate climate change.

 

So should the UK government be promoting CCS?

 

On the basis of IPCC and CCC advice, the principle of promoting CCS seems to bejustified. There may be alternative means of getting to net zero, but if this is the quickest and cheapest option, then there should be no reason to object to it. Moreover this will not just be a UK issue. Much of the world is even more locked into fossil-based technologies than the UK, so the potential of CCS as an interim or transition technology may be quite important.

 

Whether it has a positive contribution to a UK industrial strategy is another question. Potentially the answer is that it does. Countries like Germany have a much higher lock-in to fossil fuel. But as ever, geography and trading relations matter. Not all countries will enjoy the storage options that the UK has, and Brexit will make the potential to exploit European markets harder.

 

Finally there is a history to this. In 2015 the Cameron/ Osborne government cancelled a CCS programme after the spend of £ 100 million of public money and substantial private sector investment of time and resources. This was part of a major rolling back of  Cameron’s Green promises and accompanied the slashing of budgets on other “easy win” measures such as home insulation. As a marker of determination to take net zero seriously, the Labour government's move is a welcome step. But it does not detract from the need to continue to explore the wider DACC options for carbon removal and storage, nationally and globally.

MORE DISINFORMATION ON NET ZERO. COINCIDENCE OR CONSPIRACY?

Sadly we have become accustomed to the routine parade of untruths in government. But what should concern us almost as much is the peddling of ridiculous theories, misleading statistics and nonsensical arithmetic by bodies that pretend to offer some kind of independent analysis. Nowhere is this more evident than in the numerous self-styled

think-tanks and “expert” groups that set out to dispute the scientific consensus over climate science, or the relative costs of climate change versus mitigation policies.

 

One such has been the All Party Parliamentary Group on Fair Fuel, a lobby group composed of numerous climate sceptic MPs. (It should be noted that APPGs do not have an “official” parliamentary status and are very different from the Parliamentary Select Committees who do excellent work and produce well-researched reposts. They are in fact often just lobby groups for MPs pursuing particular agendas). I dealt with some of the “analysis” provided by this APPG in earlier posts.

 

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

 

and

 

COSTING AN ELECTRIC VEHICLE FUTURE. IGNORE THE ALARMISTS.

 

The latter showed the lobby report had got its numbers wrong by a factor of 50, largely because of a failure to understand either elementary physical principles of energy or the units of measurement it chose to employ.

 

This level of incompetence was however surpassed by another “think-tank”, Civitas, which was sufficiently shamed to withdraw its report on account of “factual errors” after a withering assessment by Simon Evans in the Guardian. Some of the “errors” in this case were of the order of millions. 

 

How a think tank got the cost of net zero wildly wrong

 

Losing six or so zeros might merely be seen as carelessness. But as the Evans article demonstrates, it indicates a much deeper failure of understanding. It is failure to grasp the difference between power (kW) or capacity, on the one hand, and energy (kWh), on the other. This translates, unsurprisingly,  into order of magnitude errors on cost. For those not familiar with the units used for electricity, this is akin to confusing the cost of a button with the cost of the factory that produced it.

 

There seem to have been other errors in the report, such as an equally inexcusable failure to understand the difference between the total cost of investments made under a particular policy, on the one hand, and the net costs or benefits of that policy as a whole.

 

We await with interest the revised report. Civitas, on its website, claims to “… strive to benefit public debate through independent research, reasoned argument, lucid explanation and open discussion. We stand apart from party politics ….”

Odd, then, that this report should appear immediately following Sunac’s alteration of course on UK net zero. Readers will no doubt form their own view of its “independence”, as well as the competence of its authors.

ROYAL SOCIETY REPORT HIGHLIGHTS LARGE SCALE ENERGY STORAGE AS A KEY ISSUE

I was recently asked, as one of the major contributors, to comment on the recent Royal Society report on large scale energy storage. This had been a major exercise, impressively managed and directed by the lead author Chris Llewelyn Smith, involving the examination of how a UK system based on weather dependent renewables might measure up against the actual weather variations observed over 37 years of weather data. My contribution was confined to general observations on how power systems work, and in particular how operational and investment choices can or should be managed in a market economy.

 

This was the subject of a previous post, but readers are recommended to refer not to my earlier comments but to the report itself and to the policy briefing. Links are given at the foot of this post.

 

The results were interesting and to some extent surprising. The work indicates a very large scale of storage requirement, driven primarily not by seasonal but by inter-annual variations – runs of years when wind may be below average, and a host of other interesting findings and questions. I was asked just to comment on what I saw as the core economic and financial implications regarding large scale storage.

 

Economics in his context is clearly about securing the right combinations of generation and storage, the principles to guide our decisions, and the mechanics of getting where we want to be. The objective is to find market or other mechanisms for the outcomes we want, ie getting to low or zero carbon at an affordable cost compatible with an acceptable level of reliability and energy security. It follows that this has to be much more than just a theoretical optimisation, but has to cover national policies, institutions, coordination, markets, regulation and infrastructure?

 

There are several particularly important general lessons from the report that have general economic and policy implications:

 

1.     First is the potentially huge scale of storage. With both scale and major economies of scale, we have typical infrastructure characteristics, that need to be financed as cheaply as possible. 

 

2.     Second, interactions between storage and generation choices and multiple other factors: including the demand side. The report illustrates just how complex this is.

 

3.     Third, conversion capacity, for moving energy in and out of storage, will matter and has perhaps hitherto been largely overlooked. 

 

4.     Fourth is the whole issue of policy and planning for reliability of supply. Traditionally this was mostly about adequate margins of generation capacity required over peak demands – so-called needle peaks. But the new world demands a quite different understanding of reliability, when we are talking about, for example, wind drought. The issue then is of kWh energy rather than kW capacity – a major distinction.

 

So the report raises some very serious questions. We can treat each of the above in turn.

 

First, it is clear that the storage need has all the characteristics that we associate with large scale infrastructure. This includes possible or probable incidence of natural monopoly, certainly substantial investment costs, long lived assets that are highly use specific, and a financial necessity for a cost of capital as low as possible. For private capital that would mean a high level of reassurance over future revenue streams and the future market and regulatory environment.

 

Second is the issue of the very complex choices, and their coordination, in systems that rely on storage. It’s important to recognise that there are two distinct timescales here. One is operational - operating the system as efficiently and economically as possible with whatever is the current mix of assets. The second is about necessary investment -  creating the best mix of assets for the future. In a perfect market efficient solutions on both timescales might be expected to result from market prices.  But in the new low carbon world that looks increasingly like a pipe dream.

 

The conventional view of power sector markets was that the price signals  in a competitive market derived from the immediate needs for the efficient operation of mainly generation assets, replicating what might happen in a fully optimised system such as the merit order. It also had to provide an incentive for adequate capacity.  Various extra mechanisms have often been added that attempt to put a valuation on reliable supply; this is sometimes referred to as value of lost load or VOLL.  In principle it was hoped that all this collectively would  incentivise the right mix of assets, generation, networks and storage for efficient and affordable future systems. In practice the most that can be said is that experience has been mixed.

 

So what is new. Traditional spot markets were developed to deal with gas and coal powered generators, and to replicate a merit order based on SRMC. They were also largely designed by the employees of those generators They do not translate or adapt easily to low carbon technologies with more complex, probabilistic, intermittency and operating constraints.​ Storage adds new dimensions, by being intrinsically multi-period, requiring in addition that attention is paid to conversion capacities, and the very different nature of the reliability issue.

 

The simple metrics of short run cost that sit behind conventional market mechanisms do not capture the information or the complexity required. Investment choices, on the four-way balances between generation, transmission, storage, and conversion capacity, pose further questions, implying a need for coordination. Discussion at the Royal Society brought out some additional questions on the subject of conversion capacities, my third point.

 

My fourth point may well be the most important public policy question for the future – the security and reliability of electricity supply. We all know that governments cannot stand aside from issues of energy security, and electricity security in particular, however much they might wish to. However this is another dimension where the economic and policy calculus has to change radically, with some very different metrics.

 

Historically supply reliability in the UK has been about generating capacity – kW, and occasional insufficiency of kW to meet needle peaks. But future crises, if they relate to sustained weather related shortages, will be about kWh rather than kW.  Threats of months of energy rationing require an entirely different way of thinking about reliability. Possibly once in a generation events, like the 1970s 3-day week, a covid crisis or curtailed gas supplies, may mean looking at not just energy supply planning but also the overall energy resilience of the economy. 

 

Answering all these questions means great attention to the institutional and market structures of the sector. We have to decide who should own and operate large scale storage, on public or private ownership, integration with grid operation, guarantees for private capital, who should make the decisions on energy security and reliability, and so on.  

 

All these issues are closely inter-related, and the report offers an indication of where we might find the answers. These must rest on some combination of the following:

 

·      Novel market mechanisms and incentives to reward provision of storage capacity and conversion capacity.

 

·      elements of long-term contractual assurance for infrastructure providers,  eg a regulated asset base approach, or government guarantees.

 

·      Centrally driven coordination of investment plans. Quite common internationally (eg France’s EDF and Germany’s Energiewende).​

 

 

·      Enhanced role for the National Grid 

 

·      The creation of a ‘central buyer’, to procure capacity, but also to buy power from generators and sell to retail suppliers and large consumers.

 

·      Close cooperation between energy companies who implicitly assume collective responsibility for reliability  (the US ‘power pool’ model) 

 

In summary the economics for me is about:

 

·      balancing the roles of markets, thus retaining a role for competition, and central coordination

·      financing storage as essential infrastructure, and 

·      re-evaluating the policy approach to planning for reliable future systems

 

Possibly the most important observation of all, though, is that all these things take time and the task is urgent. That means starting to address these issues now.

 

 

Large-scale electricity storage report

https://royalsociety.org/-/media/policy/projects/large-scale-electricity-storage/Large-scale-electricity-storage-report.pdf

 

Large-scale electricity storage policy briefing

https://royalsociety.org/-/media/policy/projects/large-scale-electricity-storage/Large-scale-electricity-storage-policy-briefing.pdf