Over the last few days, it has been extremely encouraging to see groups across the spectrum of British politics acknowledging the problems with our overly expensive climate change policy. Unfortunately, the Department of Energy and Climate Change (DECC) appears to be retreating into overly optimistic delusion and the Government policy is therefore still heading for a crash.
Yesterday the Energy Intensive Users Group and the Trades Union Congress released a major report on the potential impact of climate change policies on energy intensive industries. Here is what some of the groups involved said about the potential impact on jobs, sorry to quote at length but this is an important statement from a number of major employers:
"Managing Director and CEO of Tata Steel Europe, Kirby Adams said: “Many governments have determined that man-made climate change is one of the most pressing issues the world faces today. Corus can be part of the solution through relentless process improvements, investing in breakthrough technologies and supplying and developing new products that underpin a lower CO2 economy.
“Many of the taxes and costs identified in this report are UK-specific and will reduce the competitiveness of Corus’ British operations. Moreover, the very significant cumulative nature of the additional costs likely to come in under European legislation will damage the competitiveness of all EU steelmakers and limit their ability to fulfil their crucial role in a low carbon future.”
Chief Executive Officer of GrowHow, Paul Thompson, said: “The fertiliser industry has been identified by the EU’s own study to be the sector most exposed to the risk of ‘carbon leakage’. Despite our substantial recent investment to reduce greenhouse gas emissions by more than 40 per cent, the combined effect of these climate change policies will almost certainly make this a reality in the UK.”
British Ceramic Confederation President and Chief Executive of Ibstock Brick Limited, Wayne Sheppard said: “Ibstock has already invested more than £50 million in energy-efficiency improvements in the UK in the last decade. We had reduced our carbon emissions pre-recession by 18 per cent as a result. We want to invest more in the UK, but we are competing for funds from our parent company with our other plants in Europe and around the world. The UK’s climate change policies are seriously out of line with other countries’ more pragmatic approaches.”
As an earlier Civitas report showed, the closure of just one plant, the INEOS Chlor chlor-alkali plant in Runcorn, could cost 46,000 jobs directly and 87,000 jobs in the wider economy. That plant has no chance if energy costs keep rising to pay for failing climate change policies.
Last year, I wrote a report for the TPA about the changes needed to reform climate change policy and reduce costs for families. Now Policy Exchange are taking up that cause. Neil O'Brien has written about reducing the costs this morning for the ThinkTank blog. Most of what he says I absolutely agree with, particularly this part:
"If the economy is being weighed down with “green” costs that do little to limit carbon production, then opposition to green measures will only increase. On top of that, the public finances are now under unprecedented pressure. Any form of Government expenditure that is wasteful or does not have a hope of achieving its goals is now even more unjustified than it was before."
While most green policies do not affect the public finances directly, by putting further pressure on household budgets they will make the political challenge of a fiscal adjustment far more severe. So any government hoping to get borrowing under control needs to ensure that it isn't undermining that effort with an expensive climate change policy.
Unfortunately, I'm not convinced that in their report Policy Exchange have actually set out a plan to tackle the issue. Their key recommendations are:
- The feed-in tariffs scheme for microgeneration should be abolished
- The Renewable Heat Incentive should be scaled back from aiming for 12% renewable heat by 2020 to aim for 8.5%
- The Carbon Reduction Commitment should be simplified, by cancelling the permitting and cap and trade parts of the CRC scheme
- The Renewables Obligation and EU renewable energy target should be reviewed.
- At a minimum, the CCL should reformed so that it taxes carbon
- Introduce an upstream fuel tax as an approximation to a carbon consumption tax, placed upon the main fuels according to their carbon content. This would act as a floor price for the EUETS (within the UK) as well as taxing carbon more consistently across the whole economy.
It is good to see that it is no longer just the TPA and George Monbiot opposing the feed-in tariff scam. And scaling back the Renewable Heat Incentive and simplifying the Carbon Reduction Commitment might help a little.
But they've ducked the big issue by putting the Renewables Obligation and the 2020 renewable energy target off for another report. The 2020 targets (emissions and renewables) are a large part of the problem as they are so soon as they force a reliance on technologies that can be deployed quickly rather than those which might offer lower costs but take longer to put in place at scale. If you don't scrap the 2020 renewable target, and probably the 2020 emissions target as well, you can't have an affordable climate change policy. Ducking that issue just isn't good enough.
The carbon tax proposal just compounds the problem. Particularly with the shockingly undemocratic suggestion that the rate could be set by the Climate Change Committee. Putting a floor under the EU Emissions Trading Scheme (ETS) carbon price necessarily increases the cost of that scheme and could do so substantially. The kind of floor people have been talking about is €25-35, which is roughly double the price that the market has produced in recent months and that means doubling the cost of the ETS to consumers, at least in the short term. It seems plausible that adopting the recommendations in the Policy Exchange report would actually increase costs to consumers overall.
At the launch of the Policy Exchange report, Justine Greening, Economic Secretary to the Treasury, said that:
"Second, we will focus on the most cost-effective approaches. In fact, the more you care about climate change the more value for money counts. We have to make sure every penny saves the maximum emissions possible. And we will put a stop to the last Government’s obsession with equating high levels of expensive inputs with high impact."
Unfortunately, the policy coming out of DECC doesn't match this burst of good sense from the Treasury team. There is no sign that they are reconsidering feed-in tariffs, the renewable energy target or any of the extremely expensive policies being foisted on British consumers. The coalition agreement only talks about these policies to say that the coalition hope to make the targets even more extreme.
Yesterday, DECC released "Estimated impacts of energy and climate change policies on prices and bills". They think that, with the efficiency measures they are planning, the increase in household energy bills can be limited to 1% by 2020. By contrast, Citigroup Investment Research released a report last October in which they reported that:
"The UK utility sector will need to be making additional post tax profits of around £12bn per year by 2020 to meet the hurdle rate on the new investment. If commodity prices remain fairly stable this would suggest average dual fuel bills would need to increase by between 60% and 100% to generate these additional earnings. This would push prices up to between £1,650 and £2,100 in 2020. Therefore real terms increases of between 57% and 100% are possible in our view."
The basic issue is that Britain needs to invest more to meet our environmental targets than Germany, France and Italy combined - a shocking €161 billion. Those figures aren't really in dispute. Add the €77 billion needed to keep the lights on and you're looking at €236 billion (Ofgem estimate a similar figure of around £200 billion). Paying for that, and the returns that investors will want on such a massive commitment, will require a massive increase in energy bills.
The coalition think they can fix the issue with efficiency improvements. If people cut their consumption of energy enough then their bills can be the same despite big rises in prices. The problem is that the £200 billion of investment still needs to be paid for. Unless we are expecting to play the energy companies for fools and walk them into an obvious and massive loss, then all that investment will massively hike not just prices but bills. More efficiency investment will further increase the need for capital expenditure now and only really helps if it can substantially cut the amount of investment needed in the energy sector. Analysts and regulators clearly don't think that is credible enough to shift their £200 billion assumption, and no amount of pixie dust from Chris Huhne will conjure up a way of making investing £200 billion cheap.
The problem is that policy is being formed on the basis of such utterly deluded optimism about the likely cost that it will blind politicians to the serious decisions needed in this area. It makes the ongoing refusal of this Government and the last to tell us their estimate of the cost of a 42% cut in emissions by 2020 target frightening. Chris Huhne is writing articles for the FT about how a 30% EU target (meaning a 42% target for the UK) would be great for the economy but his Department is refusing to answer my FOI asking for their estimate of the cost on the bizarre grounds it would compromise international relations. What are they covering up?
We can't duck the issue of environmental targets that could undo attempts over the next decade to produce a revived, better balanced economy and sustainable public finances. It is absolutely vital that the coalition wake up to the need for serious reform to reduce the cost of climate change policy to families and industry.