LOW CARBON NETWORK INFRASTRUCTURE. SELECT COMMITTEE ARGUES FOR BREAKING UP THE NATIONAL GRID.

This comment has now been re-published as an opinion on the Oxford Martin School website.

Even in the aftermath of the referendum, there are two power sector stories that (almost) stand on their own. The first, a Competition and Markets Authority investigation of the retail energy market (gas and electricity) was the subject of an earlier comment. The second, covered here, is the House of Commons Energy and Climate Change Select Committee on the case for breaking up National Grid. Both reports fail to take proper account of the impact we should expect from commitment to a low or zero carbon economy. The market and competition paradigms that have dominated since the 1980s now need re-examination and if necessary re-interpretation. I argued that a new system architecture, especially for the power sector, may lead us to promoting much more effective competition in retail supply. But in the case of the grid there are some powerful counter arguments, not against competition per se, but in recognition of the necessity for ensuring a strong National Grid to handle the transitions to a low carbon power sector.  

Select Committee makes the argument for breaking up National Grid

The Select Committee on Energy and Climate Change has in its report on low carbon infrastructure recommended the breaking up of the National Grid. One of the key complaints about the current structure of the power sector, and the role of National Grid in particular, is that National Grid suffers severe conflicts of interest, the most obvious being its ownership of profitable assets such as interconnection facilities, along with the responsibility for transmission and system operation, both of which are regulated as public service activities.

Prima facie this is a legitimate concern in the context of the power sector as it is today. In essential respects, competition, regulation and industry organisation all reflect development of the market paradigm established with the privatisation of the power sector in 1990. This was based on unbundling of the different parts of the power sector – generation, transmission, distribution and supply. Generation is a competitive activity, while transmission and system operations (as well as distribution) are natural monopolies that are granted to a private sector business in return for being subject to price regulation controlling the return they can make for their shareholders and the quality of service they provide.

First principles of regulatory economics dictate that there potentially serious conflicts of interest arise if a business is allowed to operate in both a regulated and a competitive business at the same time. A body such as the National Grid can, under these conditions, try to do a number of things to promote its own interest to the detriment of both its competitors and the public interest. These include:

·         moving costs from the competitive business (the interconnection assets) to the regulated monopoly, thus allowing their recovery as costs necessarily incurred to keep the system going. This ends up as a subsidy to its own competitive activities to the detriment of competing generators.

·         operating the system in such a way as to advantage its own assets, thereby increasing its revenues to the detriment of competitors and the public.

·         determining its investment programmes in such a way as to advantage its own (interconnection) assets.

·         investing excessively in transmission assets – “gold plating”- in order to increase the asset base on which it is allowed to earn its regulated rate of return (although this can arise even for a transmission only business).

There does not appear to be much evidence that National Grid is abusing its position in any of these respects.  Indeed a prime function of Ofgem, the regulatory body, is to monitor these activities and prevent abuse. National Grid says it has put safeguards in place to keep competitive and monopoly functions separate. Even so there is is a case for separation of activities, in order to eliminate even the possibility of abuse, and it this argument that underpins the Select Committee report.

The Counter Argument

There are however some powerful counter arguments. The drive to a low carbon economy is going to bring profound changes to the power sector. These start with questions of technology and scale but they have huge ramifications.  Conventional assumptions about markets, regulation and governance are coming under increasing pressure.  Some of these challenges sit at the heart of the Oxford Martin Programme on Integrating Renewable Energy, and it is worth rehearsing a few of them, drawing on some particular challenges for energy markets already identified within the programme.

1.    First it is increasingly governments that take the key decisions on investment. This is for some very powerful reasons that we identify and which reflect both climate policy imperatives and wider policy and market uncertainties. Given that governments lack any technical competence in the power sector, the role of organisations like the National Grid is more and more important.

2.    Second, traditional divisions between businesses are increasingly difficult to sustain. Generation and transmission investment have always been substitutes to some degree. To that we can now add storage of electricity. Storage has traditionally been viewed in relation to its generation potential (ie the competitive part of the sector) but is increasingly seen as an instrument in managing the networks, both transmission (high voltage) and distribution (low voltage). Segmenting what might or might not be a competitive activity will be increasingly difficult.

3.    Third, conventional wholesale market structures, designed for fossil fuel generation, are not really compatible with the technical and economic characteristics of low carbon power generation. Inflexibilities, intermittency, zero marginal cost and other factors render the old merit order an inappropriate basis for efficient dispatch of generating plant. Without major re-design these markets will provide neither a signal for the right kinds of new investment, nor a basis for efficient and secure operations. National Grid sits at the centre of this issue.

4.    Fourth there is still a great deal of uncertainty around the scale or scales at which the key operating and investment decisions in the power sector will be made. One plausible direction is a move towards much greater decentralisation of generation, storage and system control, combined with much more emphasis on the consumer as an active participant in energy markets. We may see much more localised approaches to network management. But the benefits of capturing diversity, in consumer loads, storage options and intermittent generation, are such that interconnection within national systems is likely to remain of fundamental importance.  This will not eliminate the role of the Grid; it may well enhance it. And the technical expertise embodied in the current structure is not an asset we should put at risk.

5.    Finally, there is always a balance to be struck in industrial organisation between the benefits of specialisation/ unbundling/ competition on the one hand, and coordination and the minimisation of transaction costs (between unbundled entities) on the other. Nowhere is that more important than the power sector, where real time balancing of loads requires strong elements of control at different voltage levels. The nature of the low carbon economy tilts that balance towards coordination, and a strong role for the National Grid.  

Conclusion

For these reasons I believe that a cautious approach is justified in looking at the future of the public service and utility functions carried out by the National Grid. This is not to dismiss the concerns of the Select Committee. Indeed we know that, to meet the challenge of a low carbon future, there needs to be a fundamental overhaul of the system architecture for the energy sector as a whole and the power sector in particular. But to embark on a re-organisation of National Grid, in the absence of a clearer vision of where we need to get to, and focusing on issues which in a sense are problems of the old paradigm, may be a mistake. To do so without a clear direction of travel will simply add to the policy uncertainties that the Energy Institute has already identified as a major problem for new investment.

ENERGY MARKETS INVESTIGATION. MISSING THE WIDER PICTURE. (AND THE ELEPHANT IN THE ROOM.)

Even in the aftermath of the referendum, there are two power sector stories that (almost) stand on their own. The first is a report on the retail energy market (gas and electricity), and the second is on the case for breaking up National Grid. In each case important issues are raised but both reports fail to take proper account of the impact we should expect from commitment to a low or zero carbon economy. The market and competition paradigms that have dominated since the 1980s now need re-examination and if necessary re-interpretation. This is the elephant in the room. A new system architecture, especially for the power sector, will lead us to more effective competition in some parts of the market, but a greater reliance on the virtues of coordination in others.

This blog comment deals with the first of these questions – the need for more effective competition in the retail supply market. A forthcoming comment will deal the second – the future role in the power sector for National Grid.

The Market in Retail Supply

The report of the Competition and Markets Authority (CMA) on its Energy Markets Investigation was published on 24^th June. It was suggested unkindly that the date was chosen to bury bad news on the day of the referendum result, but the main criticism of the report has been that this was not so much bad news as no news; ie the report, despite its painstaking analysis of a range of questions, was a mouse.

The investigation covered a lot of ground, but, to concentrate on a core issue, a major symptom of discontent with retail markets has been the wide variation in the prices paid by different consumers. This is for a commodity, where there is (mostly) little or no means of differentiating between suppliers on the basis of quality or the type of service offered. Price is everything, but, for a commodity, suppliers all face the same costs. Suppliers, it is alleged, have often been only too happy to exploit consumer inertia, or to confuse consumers over what should be a simple choice with a multiplicity of tariffs.

There are of course other elements to the investigation, including the operation of wholesale markets and the vertical integration of suppliers and generators, but overall the findings of the report have been widely criticised by Dieter Helm and others as a failure to deal adequately with the position of the large energy companies. One of the problems for the CMA is that its terms of reference focus on competition, and a heavy emphasis on “adverse effects on competition” (AEC).  A consequence of reliance on such a narrow criterion for the public interest is that the energy suppliers can mount a relatively simple defence, namely that what might be perceived as a market abuse or a less than honest treatment of consumers is unfortunately exactly what happens in some other “competitive” markets. In other words if competition can be assumed to be automatically in the public interest, then in the absence of clearly identified AECs nothing more can or should be examined. Dr Pangloss was Voltaire’s eternal optimist. No matter how badly the market might appear to be serving consumers, “all is for the best in the best of all possible worlds”.

Some of these criticisms may well be unfair, and the report does have some solid recommendations for improvement. However a more fundamental criticism is that the focus is too narrow for an industry that is about to face unparalleled and transformative change. There are much bigger issues to be considered, probably beyond the remit of the CMA, of which the most important is the role that retail supply competition should be playing in the promotion of new models for the ways in which customers purchase electricity. This is discussed in more depth on the LOW CARBON POWER page of this blog. The fundamental problem for current retail market structures, notably in electricity, is that they are incompatible with allocative efficiency and the role for consumers envisaged in most low carbon scenarios.

The biggest single problem does not lie in the behaviour of the energy companies but in the “load profiling” arrangements which were imposed on the market, largely for administrative convenience, when retail competition was first introduced in 1998. This eliminated at a stroke the incentives for suppliers to develop innovative approaches to consumer tariffs, and probably set back the cause of “smart metering” for a generation. The CMA places considerable faith in the UK's smart metering programme to resolve what should be seen as yesterday's issues, when the much bigger question is whether it is adequate for the future challenges of a low carbon economy.

The Oxford Martin Programme on Integrating Renewable Energy will be addressing some of these issues, but many of them are already the subject of lively debate. Difficult questions include:

·         how to sustain reliability of supply with a high proportion of intermittent sources of generation, and the role of the consumer, through demand management, in maintaining system reliability.

·         whether the conventional assumption of a common standard of supply reliability is either sustainable or desirable, and whether consumers should have the option of choosing different standards for different components of the service they receive.

·         whether simple time of day, or even real time, tariffs will be acceptable  to consumers.

·         the extent to which increased pressure on local distribution networks, with more battery charging and heating loads, as well as more decentralised generation, will propel the power sector towards new system and market architectures.

Retail electricity supply is therefore an area where competition and innovation should be playing a major role in promoting the transformation of the power sector, and indeed of the energy sector as a whole, but are not currently doing so. The biggest criticism of the CMA report  is therefore that it is looking backwards at the operation of a set of market models that will be increasingly seen as obsolescent, and ignoring, in public policy terms, the future directions of the sector.

BREXIT, LAWSON, SCIENCE AND CLIMATE MYOPIA. IS THERE A THREAT TO PARIS?

Climate sceptics and neo-liberal economists are calling for a scrapping of UK climate targets in the aftermath of the UK’s referendum vote to leave the EU. Should we take this seriously? The key points surely are that the UK has been a leader in climate policy, has not previously been constrained by the EU to any significant degree, and is an independent signatory to the Paris agreement. Several of the leading contenders to become Prime Minister are on record as supporting climate targets, and it is unlikely that a major backtracking on emissions promises would be consistent with an outward looking approach to trade, either with the EU or the rest of the world.

Predictably, in the light of the Brexit vote, Nigel Lawson’s Global Warming Policy Foundation has called for a de facto reversal of UK policy in relation to climate issues.  This is wholly unsurprising given that so many of the moving spirits in the Leave campaign – Lawson himself, Redwood, Rees Mogg, together with several of the small band of Brexit economists, and the Institute for Economic Affairs, have for many  years engaged in passionate denial of both the climate evidence and the climate science.

The reasons for the correlation are clear. Commitment to and support for neo-liberal views of unfettered free markets and a minimal state are threatened, both by a Europe that does not always share those views and by a global danger whose resolution depends on global cooperation. Should this further attempt to advance the neo-liberal agenda be a cause for any concern? The answer is almost certainly not. The costs of Brexit for the power sector may be high, but the climate policy imperatives are likely to be unchanged.

The Costs and Benefits of Brexit for the Power Sector

The analysis by OIES energy experts David Buchan and Malcolm Keay has made it clear that EU membership has not been a significant constraint on UK energy policy. So Brexit is unlikely to bring any significant benefits in terms of freedom of manoeuvre. There may be some small gain in terms of less rigorous application of state aid rules, depending on how close future trading relationships will be.

Hinckley Point nuclear station is already facing serious difficulties in financing, partly for the general reasons outlined on the Power Sector page, and partly because of a growing suspicion that the  French  (despite their outstanding success in the 1980s nuclear programme)  have on this occasion gone for the wrong reactor design. If this project fails it will not be due primarily to Brexit, although deteriorating relations with the French would clearly not help. 

In principle, participation in the EU ETS carbon trading scheme may well survive the negotiations. In fact I would expect that the EU might well make it a pre-condition of serious trade talks. This is a market mechanism that, if it works effectively, helps all the participants to meet their climate targets more efficiently and economically. On the other hand, for reasons I have argued in earlier comments, the EU ETS has not been a great success, and, often to the annoyance of the Commission, has been supplemented by other national policies (not just in the UK) which have further undermined its effectiveness.  

Interconnection investment is another matter. It is an important strategic component of policy for a secure UK power sector. It provides the opportunity for major cost savings and low carbon sources of power. However, as an international network, it does require substantial technical and planning coordination between countries and agreements on commercial, legal, technical and regulatory matters. This will almost certainly be more difficult, take longer and be significantly more costly to achieve.

The biggest financial cost of Brexit to the UK energy sector may well stem from loss of the UK’s AAA credit rating, raising the cost of capital in what is going to be a very intensive transformation of the whole industry. Withdrawal from Europe will therefore make it harder and more expensive for the UK to meet its emissions targets, mainly because it has already raised the potential cost of capital, and made it harder to promote efficient interconnection.

All this however is now water under the bridge, and any adverse (or positive) impacts have little to do with climate policy per se. Much more significant will be the loss of influence for the UK on climate policy, not just in the UK but globally.

Will the UK Reverse its Climate Change Policies ?

As argued in an earlier comment, prima facie the position is very simple. If the EU signed an agreement and the UK or any member state subsequently left, then that state would not be bound by the agreement unless it had also signed the agreement itself. If it had not signed it would not be so bound. If it had signed and the EU had not, it would also be bound. The UK, unsurprisingly, has signed.

If, as seems most likely, the momentum from Paris continues to grow, a failure to ratify could make life very difficult for the UK in future post Brexit trade negotiations both with the EU and with other countries. If this is appreciated by ministers, the possibility of non-ratification may seem a little academic..

Of the frontrunners for PM, Michael Gove, despite earlier attempts to stop climate issues discussion in schools, has admitted that climate change can have a “devastating” impact on societies.  Andrea Leadsom, a prominent figure in the Leave campaign, told the Commons in March that the UK would enshrine a net zero emissions target into legislation, in line with the global pact in Paris.

The real question though is intimately linked to the form of Brexit that evolves under a new PM or a new government. Brexit economists sometimes appear to favour a completely open UK, which eliminates all UK import tariffs and allows unrestricted access to the UK market, without reciprocation. While this may be an ideologically pure view, a more realistic assumption is that the UK will seek to retain existing trade arrangements with Europe (or as much as it can) and to get new agreements with the USA, China and others. Given the global momentum on climate policies (not least in China), and the clear evidence that these challenges will shape the politics and economics of the 21^st century, reneging on Paris would look like a bad move. I doubt that a politician as cautious as Theresa May would be quite so foolish.

WHO ARE THE BIGGEST LOSERS FROM THE UK REFERENDUM?

To revert to the normal blog section click here.

The following has gone viral. I have been unable to trace and credit the original author.
Since posting events have moved rapidly. The truth in this comment has become increasingly apparent, with descent into farce across the political spectrum.

If Boris Johnson looked downbeat yesterday, that is because he realises that he has lost.

Perhaps many Brexiters do not realise it yet, but they have actually lost, and it is all down to one man: David Cameron.

With one fell swoop yesterday at 9:15 am, Cameron effectively annulled the referendum result, and simultaneously destroyed the political careers of Boris Johnson, Michael Gove and leading Brexiters who cost him so much anguish, not to mention his premiership.

How?

Throughout the campaign, Cameron had repeatedly said that a vote for leave would lead to triggering Article 50 straight away. Whether implicitly or explicitly, the image was clear: he would be giving that notice under Article 50 the morning after a vote to leave. Whether that was scaremongering or not is a bit moot now but, in the midst of the sentimental nautical references of his speech yesterday, he quietly abandoned that position and handed the responsibility over to his successor.

And as the day wore on, the enormity of that step started to sink in: the markets, Sterling, Scotland, the Irish border, the Gibraltar border, the frontier at Calais, the need to continue compliance with all EU regulations for a free market, re-issuing passports, Brits abroad, EU citizens in Britain, the mountain of legislation to be torn up and rewritten ... the list grew and grew.

The referendum result is not binding. It is advisory. Parliament is not bound to commit itself in that same direction.

The Conservative party election that Cameron triggered will now have one question looming over it: will you, if elected as party leader, trigger the notice under Article 50?

Who will want to have the responsibility of all those ramifications and consequences on his/her head and shoulders?

Boris Johnson knew this yesterday, when he emerged subdued from his home and was even more subdued at the press conference. He has been out-maneouvered and check-mated.

If he runs for leadership of the party, and then fails to follow through on triggering Article 50, then he is finished. If he does not run and effectively abandons the field, then he is finished. If he runs, wins and pulls the UK out of the EU, then it will all be over - Scotland will break away, there will be upheaval in Ireland, a recession ... broken trade agreements. Then he is also finished. Boris Johnson knows all of this. When he acts like the dumb blond it is just that: an act.

The Brexit leaders now have a result that they cannot use. For them, leadership of the Tory party has become a poison chalice.

When Boris Johnson said there was no need to trigger Article 50 straight away, what he really meant to say was "never". When Michael Gove went on and on about "informal negotiations" ... why? why not the formal ones straight away? ... he also meant not triggering the formal departure. They both know what a formal demarche would mean: an irreversible step that neither of them is prepared to take.

All that remains is for someone to have the guts to stand up and say that Brexit is unachievable in reality without an enormous amount of pain and destruction, that cannot be borne. And David Cameron has put the onus of making that statement on the heads of the people who led the Brexit campaign.

A real conspiracy theorist would go on to say that Juncker and Brussels are part of the plot. I'm not sure they or Cameron are smart enough to have thought of it that quickly. But they are certainly playing their part admirably.

A priority for the rest of us should be to question forensically the truth of the claims made by official Leave during the campaign, and the meaning and reality of the explicit and implicit promises made in relation to budgets and immigration; and then to disseminate these as widely as possible.

POST BREXIT WE CAN GET BACK TO SOME OF THE OTHER BIG CHALLENGES FOR THE ENERGY SECTOR

This comment is also published on the Oxford Martin School website.

The Energy Institute’s second Energy Barometer annual survey of energy sector professionals shows the two issues of most concern to this group as policy uncertainty, and also lack of investment. Chaotic post-Brexit uncertainties will accentuate the first problem and probably the second. However these are already important and difficult issues, with features that require exploration of the wider context of infrastructure investment. In the Oxford Martin School Programme on Integrating Renewable Energy, one of our early objectives has been to identify the areas of market challenge/ market failure in progressing to a low carbon economy. There are several potential market failures of concern to investors in energy infrastructure that are particularly acute in the context of seeking to decarbonise the power sector. They go a long way to explaining these two professional concerns for the sector as a whole. Solutions almost certainly demand a new system architecture.

Historical Background

Until comparatively recently, ie around 1990, the almost universal form of organisation for the power sector in most developed economies (and indeed elsewhere) was vertically integrated monopoly. This meant either state ownership or a private sector with strict monopoly regulation. Economists explained this through two characteristics of the sector. First this was an industry that embodied complex control and coordination issues to a degree that made it unsuited to the unbundling of the different functions of generation, system operation, network management and supply. Second, infrastructure investors putting their money into long-lived immobile assets, without alternative uses or markets, and dependent on revenue streams over 30 years or more, tend to demand, as a pre-condition, protection against any risks to their revenue stream, but especially policy or regulatory risks outside their control. Historically this was achieved through a monopoly, public or private, typically regulated on a “cost of service” or “rate of return” basis.

The first characteristic was partly overcome in the 1990 UK unbundling and privatisation. A clever market device (pricing at system marginal cost) replicated the very effective use of the merit order principle by the old CEGB (in which generating stations are deployed in ascending order of cost against fluctuating consumer load). A bidding system produced a half-hourly price and replicated the old “central controlled” optimisation of efficiency.  Even so the system operator retained significant command and control functions through the various industry protocols.

The second characteristic is more deep-rooted. Transmission and distribution remain subject to traditional style regulation. There are issues but they can be managed within a regulated return framework. Generation and supply are more problematic. The big players in generation reacted quickly to competitive markets by vertically integrating into supply, but even this has been insufficient to support new investment without more certainty at the end of the revenue chain. The result is that the only new investment in the sector is supported directly by government – as with new nuclear, or indirectly through feed-in tariffs and the new capacity auctions. And of course government has been sucked back into all major strategic decisions.

 Analysis of the Challenges

There are misconceptions about appetite for risk in the private sector – in this instance infrastructure investors such as pension and sovereign wealth funds.  These funds have a lot of money, and look for a modest but safe return. They will, unsurprisingly, not tolerate the non-diversifiable risks[1] associated with investment in a sector where revenues are at the mercy of a regulatory or policy regime, ie the entire economic value of their asset can be expropriated by an opportunistic government or regulator for the benefit of voters.  New generation assets, including pipe networks for carbon capture, and investment in storage or load management systems, may require billions to be sunk in non-moveable assets which have no alternative use, are not mobile and have very limited access to alternative markets.

Policy uncertainty is a good if incomplete description of these risks, but the difficulties are further amplified and compounded by some new features. Our analysis has identified several factors that accentuate and amplify these familiar concerns. These arise from the major transformations of the power sector envisaged as essential to cope with the challenges posed by climate change. Five are particularly important.

1. The price of carbon fails to reward low carbon investment. The EU ETS does not do the job. It does not offer long term security. It was captured in its early stages by special interests demanding excessive quotas. Its mechanisms have been too inflexible to respond to recession or to the advent of additional non-market national and EU-wide policies which further undermine the carbon price. In consequence, even if all else were satisfactory, there is no near term prospect of a market, unaided, delivering low carbon investment. This is a major factor that has driven government interventions to date, but by no means the only factor. For the UK Brexit simply adds an additional uncertainty.

2. Energy only markets promote efficient operation of existing fossil plant, but were always insufficient to reward new capacity investment without some additional intervention. This weakness is increasingly amplified by the zero marginal cost effect induced by an increasing proportion of low carbon plant with sunk capital costs and near zero operating costs. Zero wholesale prices accentuate investor concerns over revenue streams.

3. The wholesale market looks broken in more fundamental respects. It is losing contact with its original function of replicating the merit order and promoting efficient operation. So its position as the lynchpin in the market structure of the generation sector is now questionable; and new problems in coordinating system operations may result in reversion to greater reliance on the system operator and less on wholesale markets.

4. Given the very different and complex features of new low carbon generation and other low carbon technologies, the importance of a balanced mix both for operational and reliability reasons may further undermine the notion of reliance solely on markets to produce the right balance of investments, not just in generation but in storage, demand side management and interconnection.

5. The fifth factor is a retail supply market that currently fails to provide price messages that incentivise demand side and decentralised responses. This market needs a very different competition architecture to stimulate the innovations in the supply function that will be essential to ensure consumers (and “prosumers”) are properly integrated into a low carbon economy.

Conclusions

De facto, much of strategic decision making and major investment across the power sector has moved from the market back to the public arena, with more central or local coordination. This reflects both fundamentals of infrastructure investment and the nature of low carbon systems. At the same time we need more competitive structures to produce innovative solutions in downstream retail supply. Search for an improved “system architecture” will be an increasingly urgent priority if we are to deal with policy uncertainty and lack of investment, and meet all these challenges.

Reforms and transformations are likely to include a technically competent body.to handle strategic decisions for the industry, redefinition of the consumer offering and of reliability standards and protections, and re-orientation of market competition to promote innovation in supply.

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[1] Large funds cope with normal “market correlated” risks through diversification, but infrastructure investments tend to have very large and very project specific risks where the counterparty may have both opportunity and incentive to renege.

BREXIT. A CHANGE IN THE CLIMATE? FIRST REACTIONS.

Meanwhile the petition for a second referendum is gathering signatures at the rate of 1000 per minute. (8.40 am today). At this rate it seems likely to pass the 3 million mark before midday.

So what are the implications of the referendum vote for climate and energy policy issues? These are not at the forefront for the moment, and no doubt the Leave politicians, many of whom have disappeared from public view and seem to be largely maintaining radio silence at the moment, will have some difficult questions to answer that relate more closely to their campaign promises and claims. It’s perhaps worth rehearsing a few of these, with possible implications for the energy sector.

As earlier comments in this blog have suggested, EU membership has been at most a limited constraint on UK policy. We have criticised the weakness of the EU’s flagship policy, the emissions trading scheme, which has perhaps led to a greater reliance on individual national policies (across Europe), not necessarily consistent with each other or with European targets, than would have been ideal.

There are specific areas which may be profoundly affected.  The most obvious is British/ French collaboration on Hinckley Point nuclear station, which must now be facing almost insuperable political difficulties. The other area that could matter greatly to us is collaboration over interconnectors, where the EU was developing a very useful role.

The biggest issues however lie in the broader political arena, around support for climate policies in which the UK has been a leader. Most of the  leading figures in the campaign to leave the EU are climate policy sceptics, including former Tory chancellor, Lord Lawson, former environment secretary, Owen Paterson, Johnson, Gove, Redwood and many others.

Even though our politicians will be pre-occupied with fire-fighting, an early challenge in the new political landscape will arrive next week, when ministers are due to approve new greenhouse gas reduction targets under the UK’s Climate Change Act.  Advice from the Committee on Climate Change is that the UK should aim for a 57 per cent cut in emissions by the early 2030s but it is possible that the climate ideologues, emboldened by Thursday’s vote, will try to reject this.

However with millions of voters already feeling they have been the victims of a fraudulent campaign, and a petition for a second referendum already approaching 3 million signatures, my guess is that this will not be the time or the issue where the embattled Brexiters choose to stand against current policy.

Looking slightly further ahead, a critical question will be the UK’s commitment to the Paris agreement. As I have suggested before, this is an issue that will almost certainly become closely intertwined with trade, especially in relation to heavy industry.  In the steel industry context, I noted earlier that a Brexit would almost certainly entail significant devaluation of sterling, possibly to the short term benefit of that industry.  That has now happened with remarkable speed, although with Brexit I fear the prospects for steel and many other industries are looking much less attractive.

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 Small questions at random for future Brexit ministers.

·         How is the £350 million a week Brexit dividend to be spent? How much of this can now be put to restoring the cancelled CCS funding is one question that might particularly interest those concerned with climate policy? We understand from the campaign that in general the commitments to environment spending will be maintained.

·         Does the Brexit bonus of cutting EU regulation extend to disavowing the Basel 3 recommendations? This is the implication of Leave campaign’s statements to the effect that this the second largest “cost” of red tape. Since these were essentially the reserve ratio requirements to limit post-crash activities of the banks, would this impact on UK credit standing, and on financing of energy projects?

BREXIT RAMBLINGS. A QUESTION.

Costs of Regulation and Solvency of Banks (Prudential Regulation)

I have been told that the Leave estimates of the "cost" to the UK of Brussels regulation include a figure put in for the extra capital requirements imposed on the banks post-crash. This will be an extremely large sum but, as with so much of the debate, all is not quite what it seems.

First the requirement stems not from the EU but is a requirement of  the Basel Committee on Banking Supervision, which aims to strengthen the regulation, supervision and risk management of the banking sector. Basel 3 proposals were formulated by a group of central bankers from ten countries including the UK, but not the EU as such, and endorsed by the G20 in 2010.  It has been implemented in Europe through adoption into the EU legal machinery but in all essential features is a global agreement between developed countries.

Second the inference of claiming this as a cost must be that Leave are saying that this capital requirement could be scrapped if the UK were to leave the EU. That seems unlikely. It would, one might assume, be the end of London as a financial centre and probably consign the UK to banana republic status.

But I would be grateful if anyone has any information that contradicts any aspect of the above.

Addendum. A commenter has advised that exactly this point has been covered by Jonathan Portes in an overall review of the supposed costs of EU regulation. Portes says this is the second highest item in the list.

BREXIT RAMBLINGS

"Responsible debate is paramount. I fear, however, that we won’t get it. What I do know is that Britain should be engaged and leading in Europe not disengaged and waving goodbye."

Jo Cox on her website at the start of the referendum campaign in February. Reuters.

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We are a very different country to what we used to be 6 months ago. “Know-nothingism” and conspiracy theory are now part of British public discourse and have been legitimated by leading politicians. Experts are corrupt, anyone who disagrees is lying or on the take, there are secret plans to let in foreign hordes, abolish the British army etc. Where conspiracy theories grow, extremists lurk.

FT reader, paraphrased, 16 June

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However if anyone feels they could do with more facts, then I can strongly recommend the dispassionate analysis provided by Tim Harford on Radio 4  facys and figures  on Saturday.  On the famous £ 350 mn he essentially covers the same ground as Andrew Tyrie’s Select Committee Report (I hope everyone has read paragraph 36). But there is a lot more including some surprising facts on the “sovereignty” issue.

There is a very good analysis of the campaign in Andrew Rawnsley’s Observer article.  

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A few more snippets

The economy

……Vote Leave has said that £350m a week is “the core number”, and that it is using the number “again and again”. It is very unfortunate that they have chosen to place this figure at the heart of their campaign. This has been done in the face of overwhelming evidence, including that of the Chair of the UK Statistics Authority, demonstrating that it is misleading. Without qualification this is unavoidable.   Brexit will not result in a £350m per week fiscal windfall to the Exchequer as a consequence of ending the UK’s contributions to the EU budget. Despite having been presented with the evidence contradicting this claim, Vote Leave has subsequently placed the £350m figure on its campaign bus, and on much of its recent campaign literature. The public should discount this claim. Vote Leave’s persistence with it is deeply problematic. It sits very awkwardly with its promises to the Electoral Commission to work in a spirit that reflects its “very significant responsibility” and the “gravity of the choice facing the British people”.

Paragraph 36. Treasury Select Committee Report.

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Immigration

Our findings indicate that, when considering the resident population in each year from 1995 to 2011, immigrants from the European Economic Area (EEA) have made a positive fiscal contribution, even during periods when the UK was running budget deficits, while Non-EEA immigrants, not dissimilar to natives, have made a negative contribution. For immigrants that arrived since 2000, contributions have been positive throughout, and particularly so for immigrants from EEA countries. Notable is the strong positive contribution made by immigrants from countries that joined the EU in 2004.

2014 Report on the Fiscal Impacts of Immigration. Dustmann and Frattini. Probably the most careful and comprehensive analysis of data on this issue to date.

One implication you might draw from this is that under any “points system” seeking to identify the most economically productive, European migrants will continue to generally out-compete non-European, and Brexit impact on the European content of immigration will therefore be small. Since non-EEA immigration, of whatever status, is prima facie unaffected by the Stay or Leave choice, political choices on immigration should be seen as largely irrelevant to the Brexit debate.

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The Bank of England

The calibre of, and grasp of constitutional issues shown by, some of our MPs is revealed in the recent letter from the Governor of the Bank of England to Bernard Jenkin. 

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A lot of parallels with the climate debates

So what has this got to do with climate policy? The main connection is the protagonists. Much of the same continuous low level misrepresentation, vilification of “experts”– in this case science and scientists, and a perversion of evidence and argument, with largely the same personnel. (See earlier blogs.)

GLOBAL TEMPERATURE IN MAY 2016. RECORD RUN CONTINUES

For the 13^th consecutive month, May 2016 was the warmest month on record for global temperature according to the NOAA.  Whether this was the 8^th (NASA) or the 13^th consecutive month (NOAA) depends on which data set you are looking, but none of the different observation sets indicate significantly different patterns or trends.

It is now expected that a moderating el Nino, which stirs up the earth’s heat energy content to put slightly more heat into the surface areas on which measurement is concentrated, will result in some slowing down. So it is possible that May will be the last “record month” for the time being. What is abundantly apparent from the data of the last two years, however, is that the underlying global temperature trend is continuing to move inexorably upward. Comparison with peak years coinciding with previous el Ninos (eg 1998) shows a clear and substantial increase The “pause”, if it ever existed, is well and truly buried.

One of the hopes, promoted inter alia by climate sceptics trying to play down climate impacts, was that we would see some amelioration of temperature rises with CO₂ concentration, due to an established physical phenomenon called the log linear effect, in which, if CO2 were the only factor involved (ie ignoring feedbacks) the warming impact eventually rises much more slowly than the rise in CO2 concentration.[1]  To illustrate, doubling from 560 ppm to 1120 ppm might theoretically only produce the same impact as doubling from 280 ppm (pre-industrial level) to 560 ppm. What now increasingly looks like a steady linear increase suggests that this factor is not yet having much effect.

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[1] This issue is one of those discussed on the page SCIENCE VS SCEPTICISM

ENERGY POLICY, TRADE AND IMMIGRATION. CLIMATE RELATED ARGUMENTS FOR REMAINING IN THE EU.

In energy and climate policy, the UK has both led and benefited from membership of the EU.  Europe’s policies have had some defects, but continued membership provides the opportunity both to strengthen Europe’s backbone in dealing with climate questions and to exert more leverage internationally. Ultimately climate issues cannot be separated from other important features of the campaign, including trade and in the longer term migration.

This blog usually avoids the overtly political but the UK referendum carries so many implications for climate policy globally that it seems impossible and irresponsible to avoid entering the fray.  Much of the essential substance for energy policy, from a focused UK perspective, has been carefully analysed by Buchan and Keay of OIES[1].  It is clear that, in this field, the UK has been a leader in the EU, thereby increasing the effectiveness of its own policies, but it has not suffered any serious constraints in terms of its own freedom of manoeuvre.

Probably the most important inference to be drawn from their work is the importance of the international leverage that the UK can exert through EU membership. The UK is, with very broadly based support, heavily committed to strong action on emissions, exemplified in the 2008 Climate Act. Through the EU it can leverage its efforts in mitigating the worst outcomes on climate change.  This is very important both in maintaining the pressure on or support for potential backsliders in Europe, such as coal-dependent Poland and "Green" but poorly performing Germany, and in wider international negotiation.

Previous comments in this blog have focused on some of the manifest weaknesses of the EU as a whole, in relation to its flagship carbon trading schemes and an obsession with market fundamentalism (the latter at least in part a product of UK influences on policy). But these merely emphasise both the opportunity to achieve positive change and the cost of being outside the tent, particularly if the UK then finds itself bound by policies over which it has no say (ie a real loss of sovereignty).

On the two issues that have dominated the referendum campaign, there are some very strong connections to both climate policies and the impact of climate change.

Trade and Climate Policies.  

Brexit economists (notably Minford) have argued that the UK will gain from a purist free trade approach in which it opens its own borders to tariff-free imports, without any reciprocity on the part of others or any formal trade agreement.  As a theoretical free trade argument this is at least a tenable and ideologically pure position, although most trade economists will disagree with it and many regard it as politically absurd. But in any case it falls to the ground in a world in which externalities, like carbon emissions, are not properly priced.

Following the Paris agreement it will increasingly be impossible to sustain trading relationships without agreements that cover, inter alia, the treatment of the energy sector, whether through carbon taxes or emissions quotas and trading schemes. This will be to ensure a level playing field for manufacturing competitiveness and prevent one country free riding on the abatement policies of others. So if the UK is to participate in the global economy of traded goods, it will have no option but to sustain low carbon energy policies. Again it makes far more sense to participate in the rule making with our largest trading partners around what is still the world’s most sophisticated and developed trading scheme, and to improve that scheme, possibly extending it to embrace other countries moving towards low carbon policies, rather than to attempt to start from scratch. [China, incidentally, is piloting seven separate regional carbon trading schemes.]

Climate and Migration. 

Migration has become a very emotional subject into which it is difficult to inject rational analysis and fact. Economic considerations are not the only issue, but it is worth noting that one of the most comprehensive analyses available reached conclusions is not widely reported in the current debate. Dustmann and Frattini [2]found that looking at the fiscal impact of immigration on the UK economy, and with a focus on the period since 1995:

Our findings indicate that, when considering the resident population in each year from 1995 to 2011, immigrants from the European Economic Area (EEA) have made a positive fiscal contribution, even during periods when the UK was running budget deficits, while Non-EEA immigrants, not dissimilar to natives, have made a negative contribution. For immigrants that arrived since 2000, contributions have been positive throughout, and particularly so for immigrants from EEA countries. Notable is the strong positive contribution made by immigrants from countries that joined the EU in 2004.

Of course this analysis represents only a snapshot of just one of the economic questions related to migration, and there are plenty of qualifications to the analysis. Nevertheless it does seem surprising that immigration concerns, in the referendum debate, should have become quite so focused on EU immigration, when the economic questions around non-EU immigration are prima facie much more significant.  Looking ahead to a much bigger picture, one of the consequences of significant climate change will be a very large increase in migration across the globe, as particular populations, mainly non-EU, fail to adapt. It has been claimed that some of the increases in global migration already taking place are at least in part due to climate factors (one being persistent drought in the Middle East[3]) as well as associated conflicts.

Europe as a whole has some important ethical and practical choices to make in how it responds to this future - of a world on the move - and has so far failed to grapple with them adequately, but they are not choices that the UK, or any other country, will be able to escape.

And the future for climate policy?

Energy and climate policy has so far featured little, if at all, in the referendum debate. But what was in theory supposed to be a choice on a fundamental constitutional issue has quickly metamorphosed into a choice between staying with an imperfect status quo and a rather incoherent manifesto, which effectively pledges more spending on the NHS, continued farming subsidies and various loosely specified plans for new trade deals and to control immigration. In this context, Andrea Leadsom, a prominent figure in the Leave campaign, told the Commons in March that the UK would enshrine a net zero emissions target into legislation, in line with the global pact in Paris.

Whether this squares with views of the climate sceptics, who make up the bulk of the political wing of the Leave campaign[4], is another question.

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[1] The UK in the EU – Stay or Leave? OIES. Oxford Institute for Energy Studies. 2016

[2] The Fiscal Effects of Immigration to the UK. Published in The Economic Journal, 2014

[3] NASA study. “Worst drought for 900 years.”

[4] Where Brexit and climate-change scepticism converge. The Economist. 22 March 2016