A greener, cheaper energy policy

By Neil O'Brien of Policy Exchange.

Yesterday saw two big developments in Britain’s climate policy.

Firstly, the Department of Energy and Climate published a new report, which says that our current set of green policies are on course to raise electricity prices by a third. Given that a 1% rise in energy prices pushes around 40,000 people into fuel poverty, this is a major problem.

But there is also a big political opportunity here.  Here’s why.  Gordon Brown woke up to green issues pretty late in the day, and the goal of the last Government sometimes seemed simply to be seen to be doing as much “green stuff” as possible, with cost no object.

As a result, our current green policies were been cobbled together quickly and badly.  Not only are some of the individual policies pretty ropey, but the policy mix taken as a whole doesn’t really work: in fact lots of the different policies overlap, or even cancel each other out.  Instead of being a coherently designed system, politicians have just added more and more policies over time.

It’s a now a real mess.  We have a huge number of different green policies, including (but not limited to):

•    The EU Emissions Trading Scheme (EUETS)
•    The Renewables Obligation (RO)
•    The Climate Change Levy (CCL)
•    The Carbon Reduction Commitment Energy Efficiency Scheme (CRC)
•    The Feed-in Tariffs for microgeneration (FiTs)
•    The Carbon Capture and Storage Levy (CCS Levy)
•    The Renewable Heat Incentive (RHI)
•    Air Passenger Duty (APD)
•    And Fuel Duty is often cited as a green tax.

And within each of these different polices there are often several rates and exceptions.  For example, oil, coal and gas attract different rates within the Climate Change Levy.  The rules on different types of micro-generation would require thousands of words to explain.

Worse still, the different policies are all layered on top of each other, in a rather higgledy-piggledy fashion.   For example electricity prices already encompass the costs of the EUETS, the RO, and will soon incorporate the CCS Levy and Feed-in Tariffs.  For many businesses, the CCL is added on top – soon to be complemented by the CRC.  Some companies will face costs from all this alphabet soup of policies.

Some of these policies are much more effective than others. The differences are huge: in fact Feed-In Tariffs for micro-generation are about 100 times more costly than the Climate Change Levy.  The main reason for this is that politicians can’t resist picking winners – favouring some technologies over others for political reasons, rather than letting the market find the cheapest way to reduce emissions.

For example, the Renewables Obligation and the Feed-in Tariff are two technology-specific policies which aim to encourage lots of renewables.  This ensures we get lots of shiny new wind farms, rather than reducing emissions some other way.  However, it also inflates the cost of going green enormously.

Some people argue that the much higher costs of these policies are justified, because they support demonstration and early-stage deployment of new technologies. There would be a strong case for this, and helping to promote technology change is one of the most useful contributions the UK could make to addressing global carbon reduction.  However, policies like the RO and FiTs, don’t really do this: they are mostly about generously subsidising the mass deployment of known technologies like wind.

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.

However, if we rationalise our green policies we can reduce emissions by more at a lower cost.  Hence the title of our new report, Greener, Cheaper.

There are signs that the government can see the opportunity here. The other big development of yesterday was an excellent speech by Justine Greening, who leads on environmental issues at the Treasury.

At the launch of Greener, Cheaper she promised the new government will “focus on the most cost-effective approaches” and aim for “action that works, not on headlines.”  She argued that the more you care about climate change the more you should demand that policy is run on a cost effective basis.  That’s exactly the right approach.  In fact, it’s the only approach that can work.

Amazingly, this is the first time I have heard a senior politician admit that current policy is “less efficient than it should be”, and that there is “scope to rationalise, at the same time as improving, policy”.  As part of the Comprehensive Spending Review the government will be re-examining climate policy.

So how do we start to rationalise our green policies?

We should get rid of the least cost-effective policies first.  I’d suggest we start by abolishing feed-in-tariffs (FiTs).  These subsidise small-scale “microgeneration” using technologies like home solar and wind power. Consumers get rewarded for the surplus electricity they feed back in to the national grid. But the subsidy works out at something like £460 for every tonne of carbon that the scheme saves from being pumped into the atmosphere. The total cost of FiTs is £8 billion over the next 20 years.  This money could be spent much more effectively on other approaches to tackling climate change.

But we could aim to be more ambitious, and aim for a much simpler approach.  We could replace the whole bewildering tangle of schemes we have at present with a simple carbon tax.  The report backs an “upstream” tax on fossil fuels like coal, gas and oil as the simplest and easiest to collect type of levy.

That way, instead of Whitehall picking winners – for example, deciding that there should be massive investment in wind-power – the market would be left to decide the most efficient way to take carbon out of the economy.  The coalition are already talking about a floor price for carbon (a kind of carbon tax).  The question is whether they will use this as an opportunity to tidy up the chaotic mix of policies left behind by Labour.

The coalition should be bold.  Current policy is a mess: it is failing the environment, creating unnecessary costs, and pushing people into fuel poverty.  But we can cut the costs of cutting carbon.  There is a better way.