Peter Franklin: The benefits of real free trade in carbon

This is an extract from the forthcoming collection of essays 'Green conservatism: protecting the environment through open markets'. Similar collections will be published under the Green Alliance's ‘Green social democracy’ and ‘Green liberalism’ projects as part of the Green Roots programme, which aims to stimulate green thinking within the three dominant political traditions in the UK. 

There’s no use denying it, the environment is a difficult area for the Conservative Party. And the biggest environmental issue, climate change, presents the greatest difficulties.

Although Margaret Thatcher was the first world leader to warn about the threat of global warming, and although David Cameron famously highlighted the issue too, other prominent Conservatives including Nigel Lawson and Peter Lilley have been outspoken in their opposition to the mainstream agenda on climate change.

Other Conservative or right-leaning voices, both in politics and the media, have gone even further, denying the reality of climate change altogether.

Climate sceptics can be found in the other parties too, but in the Conservative Party the debate is out in the open, with battle lines drawn between those holding the establishment view and those in outright opposition. In some ways, it is healthy to be having this open debate, the last thing we need is an environmental correctness that brooks no dissent.

However, the argument I want to make here is that the choice that Conservatives are presented with: either complete acceptance or complete denial of the establishment view, is a damaging and false one. To understand why, I think we need to look to the past, when the Conservative Party found itself in a similar position on a different issue.

In 1989, John Moore, then secretary of state for social security in Margaret Thatcher’s government, delivered a speech entitled ‘The end of the line for poverty’. By only considering poverty in the absolute sense of widespread malnutrition and homelessness, the Conservatives effectively removed themselves from the debate over the modern day poverty of social exclusion, worklessness and dependency. The field was, therefore, abandoned to our opponents, allowing them a free hand in shaping the public policy response. 

It wasn’t until many years later that Conservatives, led by Iain Duncan Smith and his Centre for Social Justice, returned to the fray, successfully changing the terms of debate as a result of three key actions. First, accepting the reality of the issue at stake; second, exposing the flaws in the established policy response; and, third, proposing solutions not just pointing out problems. 

It’s now time for Conservatives to come together to consistently apply this three-fold approach, ie accept, expose and propose, to the issue of climate change. The sooner we engage both with the urgency of the challenge and the flaws in the existing policy framework, the sooner we can get on with the real task at hand: the development and implementation of workable policies that stand a chance of succeeding.

Climate change is, first and foremost, a resource allocation problem. The world’s capacity for dumping carbon into the atmosphere without compromising climate stability is limited. Therefore, it should be regarded as a valuable natural resource and a scarce one at that.

Typically, the most efficient way of allocating scarce resources is to ensure that they are transparently priced and freely traded. As we know, pricing and trading carbon is difficult, as has been made clear by the mixed results of current attempts to do so. In particular, the faltering progress of the EU’s Emissions Trading Scheme (ETS), which has already come close to collapse, has thrown the entire concept of carbon markets into doubt. As Conservatives we should regard this as a problem on our patch. After all, who else has more reason to find a market solution to a resource-based policy challenge?

It is sometimes said that the market represents the ‘law of the jungle’. That, of course, is nonsense, there are no markets in ‘the jungle’, all are dependent on a framework of law. However, some are more dependent than others, and carbon markets more than most. If it weren’t for government intervention, the cost of releasing carbon into the atmosphere would be zero.

In designing carbon markets we should be completely upfront about this intervention. Many of the problems of existing carbon markets stem from the pretence that the price of carbon is somehow discovered, through the ostensibly neutral workings of the relevant trading mechanism. In fact, the price is ultimately determined by top down, state led decisions, such as emission targets and the allocation of free permits. 

Arguably, the EU ETS is not a market at all, but a way of laundering political deals through the semblance of a market. Moreover, because a complex trading system is still involved, the price of carbon, though dependent on public policy, is unpredictable, if not downright unstable. Thus, what we end up with is the worst of both worlds: all the politicisation of direct government intervention and all the unpredictability of the market place.

It would surely be better to openly fix a stable and transparent price for carbon, for instance through a carbon tax,  thereby sending a clear price signal into real markets, such as the stock market, rather than rely on quasi-market mechanisms that rely on continued political patronage for their very existence.

We also need to take a clear sighted view of the interaction between the main mechanism for carbon price setting and other climate change policies. The effect of these side mechanisms, such as the Renewables Obligation is to create not one price for carbon, but many.  These may be justified in terms of certain strategic policy objectives, such as diversifying Britain’s energy mix, but their effect is to send mixed signals into the market place, often with perverse consequences.

As Conservatives we should be arguing for carbon markets that more adequately deliver on what markets are meant to do, which is to achieve the most efficient allocation of resources at the least cost. This is much more than a technical exercise in policy design. It means taking up cudgels against the many and varied interests currently milking the system for all its worth. And that won’t be easy, because while some of these interests are obvious rent-seekers, others will be able to draw upon public sympathy. We should press on regardless.

After all, the purpose of cutting our carbon emissions is not to provide a living for this or that company, industry or technology, but to sustain our very way of life.