Tuesday, July 4, 2017
This blog will remain quiet over the next several weeks as the author is also working on some substantial papers about low carbon issues, not to mention some summer relaxation.
Angela Merkel has indicated she will not shrink from confrontation with Trump in the forthcoming G20 talks, where free trade and climate change are both on the agenda. I suspect this is a good demonstration that trade, energy and climate will increasingly be interlinked in international affairs. Trump of course has unconventional notions of what free trade actually is, and, albeit somewhat incoherently and inconsistently, seems wedded to the view that the threat of climate change is some kind of hoax. Nations that have committed to Paris and are following through on low carbon technology and investment are not going to take kindly to unfair competition from producers who can undercut them by refusing to take climate policy seriously. Some economists have even gone so far as to propose border adjustment taxes, a form of tariff on imports, to level the playing field. Trump’s position is in any case inexplicable even in normal rational terms of US self-interest. But this row will also put the UK’s own Brexiters somewhere between a rock and a hard place. Will they go with the rest of the world, or will they follow Trump, the DUP, and the apostles of right-wing fundamentalism – Lawson, Redwood, Rees Mogg etc, in the delusion that the clear messages from the science on climate change are simply wrong?
One of Trump’s most important bases for political support is the “rustbelt” regions of coal and steel, which have suffered dramatic economic decline in recent years. Part of the story, for coal at least, is that it is being pushed out of the energy mix in the US by the success of fracking in making the US close to self-sufficient in oil and gas. Inter alia this has also had some knock-on effects, reducing the price of coal on world markets, and increasing coal consumption in some EU countries. So trade has been at least a partial relief for a hard-pressed US coal industry.
More generally Trump’s policies seem to care little for the “left behind” in the rustbelt. One possible reconciliation, between declining coal and a rising urgency for action on climate, might have been investment in carbon capture technology, widely seen as an essential technology for a low carbon future, simultaneously protecting or even increasing domestic coal demand and providing new jobs in infrastructure, but that option has not even featured on the radar. Trump prefers to stick to the unthinking slogans of his campaign, professing support for American jobs while doing little in reality to support the “left behind”. In fact an isolationist US that ignores new low carbon technologies will most likely cost American jobs, probably in the short term and certainly in the long term.
Brexit, Free Trade and the Hard Right in the UK
But another interesting paradox is the position of British politicians now trying to take the UK out of Europe, and out of the single market and customs union, in the interests of more free trade in a global environment that will be increasingly unfriendly to countries that choose to ignore their responsibilities on carbon emissions. An important part of the “official” argument for leaving the EU was for free trade with the rest of the world, but a very large part of political establishment support for Brexit also coincided with vigorous opposition to taking any action on climate – Lawson, Redwood and Rees Mogg being just three of the more extreme polemicists in this area. Outside the “establishment” UKIP and Farage have followed the same line, and I drew attention in earlier postings to the close correlations between support for Brexit and opposition to climate policies. This was evident not just among politicians, but among Leave supporting economists, including Leave’s most prominent economists Patrick Minford and Roger Bootle, who argued that exiting the EU would enable the UK to escape EU regulations on climate change.
To be fair to Minford, he was at least in some respects consistent, arguing both that trade deals, post Brexit, were an irrelevance, and that the UK should accept the further decline of its manufacturing base, concentrating instead on services. But, unsurprisingly, that has not been the Leave political line, nor would it have played well with Leave voters in the North of England.
May’s government, faced with the appalling consequences of actually leaving the single market and the customs union, is however desperate to be able to demonstrate the prospect of a lucrative new trade deal with someone else. Step up to the plate, the UK’s largest trading partner after the EU – the USA and Mr Trump. Never mind the negative sides of such a deal for British farmers and consumers, the reality is that Mr Trump appears to believe in bilateral balances, the next best thing to barter in the modern world. Since the UK has a surplus with the USA, one of the few major economies for which this is true (it is in deficit with the EU for example), this looks like a recipe for disaster in any trade deal. Opposing Trump on climate matters is hardly going to help.
In fact May is now signalling solidarity with Merkel on climate at least, although whether we should put this down to the UK’s legal obligation under the Climate Act, or to a growing realisation that perhaps the EU does matter after all, not to mention global climate, is not clear.
Trade, Climate, and Carbon Taxes
If nothing else the prospect of conflict on both climate and trade, in the forthcoming G20, demonstrates the potential for close political connection between the two. But the inseparability of the issues has always been clear, however much that may upset the ideological position of most of the Brexiters. . A corollary of “free and fair” trade means, in a post Paris world, going along with what is now the global consensus on climate. Defaulters cannot be allowed to compete on an equal basis with countries who are taking measures that may damage their competitive position. This idea also sits behind the EU’s understandable, though not very effective or successful, attempts to establish an EU-wide arrangement for trading emissions. This at least provides a level playing field for intra-EU trade.
Two Oxford economists, Hepburn and Helm, have long proposed, most recently in a February 2017 letter to the FT, a carbon border tax. Lakshmi Mittal made the case for a carbon border adjustment to put European steel on a level playing field with global competitors, to inhibit “leakage” of emissions to other countries. Hepburn and Helm simply extend the argument to other energy or carbon intensive sectors. It is increasingly clear that carbon taxation regimes are likely to be more effective than rather inflexible emissions quota trading. Needless to say, such a regime would have major ramifications for trade. Not least it would have demolished the cost advantages for EU generators in switching to cheap US coal dumped on world markets. Even if it has yet to gain much political traction, the idea of carbon border taxes emphasises the close interactions of trade and climate policies.
 The Brexit trio of Johnson, Gove and Davis also have form in this area, but are somewhat more nuanced.
Thursday, June 29, 2017
Debates on policies to combat climate change often include a collection of long running arguments around the cost of capital, or the time discount rate for comparing costs and benefits. These were prominent in arguments over the recommendations of the Stern Review, mainly in attempts at a cost benefit analysis (CBA) of the public policy case for action to mitigate climate change. But assumptions on cost of capital do also matter a lot in what are now the very real questions of comparing alternative investments to reduce emissions. And of course the actual cost of capital employed will have a major impact on the affordability of future energy use, and prices to consumers. Sadly this is one of the areas where the disciplines of economics and finance have been at their weakest, in failing to provide a rigorous and consistent approach to the subject, at least in relation to the public discourse.
Let us start with the public policy arguments around climate policies, and the claim sometime made that the case for action depends on the assumed discount rate, the rate at which we discount the significance of future benefits or costs. One version of this argued that the costs calculated by Stern could only justify action to mitigate climate change if the time discount rate could be assumed to be 1% or lower. Given that even a modest probability of human extinction (or more realistically of the massive forced reductions in population of the kind against which some environmentalists warn us) might be considered to have a near infinite cost, the approach was always intrinsically unlikely to convince anyone. At times, much of the debate on this subject resembled nothing so much as the supposed discussions of mediaeval scholars as to how many angels could stand on the head of a pin.
The real problem in these arguments was the weakness of a cost benefit approach in dealing with systemic risks and possible catastrophes on a long term and global basis. CBA is usually targeted on situations where the alternatives can in some sense all be considered “at the margin”, Inter alia it became increasingly clear that the real problem lay less in evaluating notional GDP projections in alternative climate scenarios, and much more in the climate induced consequences, including migration and conflict. These considerations were compounded by the problem CBA has in dealing with uncertainty and with risks that are not amenable to simple probability quantification. Add to that the nature of the potential risks, which are on an unimaginable scale, and it ought to be clear why the calculation of the costs of a dystopian future, for comparison against an almost equally impossible set of counterfactuals as a baseline, is a rather futile exercise.
Economic models designed for fairly simplistic macro-economic analysis (and they often prove to be not very good even for this relatively straightforward task) were applied to timescales and hypothetical events well beyond their design capability, and it was quickly recognised that they did not come remotely close to capturing the true nature of climate risk. What is now accepted, and is implicit in the international acceptance of the Paris agreement, is that the risk of climate catastrophe is simply too big to be borne, and that mitigatory or remedial action is therefore a necessity.
Fortunately this part of the argument over climate policy is now settled in the public domain, with almost all nations united in their recognition of the need for actions of the kind indicated in Paris. Cost of capital arguments were ultimately of little importance in determining the fundamental imperative for policy action in relation to climate. Even so the arguments were revealing in the differing attitudes they uncovered. Nigel Lawson’s polemic against science driven climate policies argued strongly that we should care increasingly less for the futures of our grandchildren or more remote generations, arguing for much higher discount rates, of the order of 10% or more, largely on the grounds that these were closer to the target rates applied in business decision making.
The impact of discounting at such high rates makes damages a 100 years hence worth a very small fraction in terms of today’s values. Unfortunately for this argument, and as we suggest above, the scale of the perceived risk – sometimes stated in worst case scenarios as a forced population reduction of many billions - can also be described as almost infinitely large, and this is clearly the position implicit in what we might describe as the “Paris consensus”.
The Lawson position was, I suspect, based on a profound misunderstanding of how business works, especially in extrapolation of the most superficial approaches to investment appraisal. It may reflect multiple confusions over the way businesses treat investment appraisal, the debt and equity balance, use of real or nominal rates, and the appropriate assumptions about market correlation, which are a major feature of the standard CAPM model of finance. Another interesting corollary of using a high discount rate would, of course, be that it would not be necessary to set aside any significant sums today for nuclear or other decommissioning in 100 years time. Needless to say this is not an approach that is argued very often.
Lawson’s hypothetical rates are so far from the actual rates of return achieved in most business, most of the time, that we must assume one of two things. Either business is incompetent in investment appraisal, or Lawson just does not understand the subject. As he was perhaps one of the less able Chancellors of modern times, and remains someone who clearly fails to get to grips with climate science or the interpretation of statistics, the latter seems more likely.The reality seems to be that, under the right conditions, major projects can be financed at very low real rates of interest. But that is an important issue to which I hope to return. The subject remains important in practical terms, both for choosing investments and making them affordable.
 To give credit to Stern he never proposed CBA as a main driver of policy, and his post-Review thinking on the subject gave much more weight to the catastrophe avoidance arguments.
 In fact this may be an early modern fabrication, or simply an illustration of a category error in a more substantial metaphysical discussion.
 The exceptions being Trump’s USA, and Nicaragua, but the latter on the grounds that the proposals did not go far enough.
 The reality of actions is of course far less clear, but there is progresss.
 An Appeal to Reason. Nigel Lawson. Duckworth Overlook, 2008.
Wednesday, June 28, 2017
DIRECT EXTRACTION OF CO2 FROM THE ATMOSPHERE. IS THIS REALISTIC? IF SO IT COULD BE A GAME CHANGER?
A Swiss company has told the Carbon Brief website that there is a real prospect of reducing the costs of the direct extraction of carbon dioxide from the atmosphere to a point where it will be possible to consider large scale operations that could substantially offset current emissions and even feature in attempts to reduce concentration levels, in the so-called “zero carbon” or “net negative CO2” policies that many people consider are implied in the Paris agreements. If their promises are realistic, then this would be a truly revolutionary development, with profound implications for our approach to climate policy. But there will be a lot of questions to answer on the way.
A Swiss company has opened what is believed to be the world’s first ‘commercial’ plant that sucks carbon dioxide from the atmosphere, a process that could help reduce global warming, it is claimed. The firm, Climeworks, expressed confidence they could bring down the cost from $600 per tonne of the greenhouse gas to $200 in three to five years with a longer term target of $100. This is almost an order of magnitude lower than previous estimates of the cost of direct carbon extraction, widely assumed to be around $1000 per tonne.
This is also one of the two most important candidates for a game changing technology breakthrough that I identified in my 2016 submission to the House of Lords Inquiry, which can be viewed as a separate page on this site. If it proves to be feasible then it may represent a considerable advance on what has hitherto been considered the only feasible route to net negative carbon, the so-called bio-energy with carbon capture and storage (BECCS) approach. Shortcomings of the latter include the limited supply of bio-energy, not least due to land availability constraints, and controversy over whether this really represents a sustainable approach. So direct sequestration, if feasible, is very attractive.
There are clearly still a large number of outstanding questions before we get too excited by this prospect.
Is $200 or $100 per tonne really achievable? And if so is the technology scaleable? And to what scale? If it is scaleable, it seems likely the world could be seeking an expansion of the process well beyond the 1% of current emissions suggested as an ambitious target by Climeworks.
The other big question is how to dispose of the CO2 after its capture. This is a big issue, and a very substantial part of the cost for all carbon capture technologies, including those based on removing the CO2 from fossil fuel combustion. This cost needs to be factored in and is bound to be a fairly substantial element in the total. It does not appear to be included in the Climeworks figures. Moreover the disposal issue, at scale, will raise its own environmental and risk issues.
But if these questions can be answered this could be a very significant technology advance. It is certainly not the magic bullet that solves all problems, but it could have some important consequences for the way we look at climate policies. Why?
First, one of the most terrifying features of the climate change threat is the apparent irreversibility of the processes involved. CO2 emissions are cumulative. If they cannot be removed on any scale, then there is a real risk of a future where the climate science starts to tell us there is no return. At this point priorities would take a dangerous turn towards survival rather than the global idealism, or at least hope, that underpins global agreements. But it is not just that dealing with a very expensive problem is psychologically more attractive than coping with the prospect of unavoidable catastrophe. Ability, in principle at least, to partially reverse out of the worst consequences, puts a finite bound on the costs of making the wrong policy choices. Inter alia it ought to increase the available policy options.
Second, and more importantly, direct sequestration has the potential to change the basis of policy in relation to carbon pricing. I have previously commented on the weakness of traditional cost benefit analysis (CBA) in this context. CBA fails to provide a basis for a carbon price, and the failure is in large measure due to an impossible number of uncertainties (in climate, geographical and economic impact) to which probabilities cannot be assigned from any established base of knowledge. But if we have a clear way of putting a cost on CO2 removal, then we have at least a first approximation to a “true” cost of CO2 emissions. This might inter alia provide a better justification for effective carbon pricing, and even for global adoption of a “common” rate of carbon tax. It could be a much more hard-edged approach than complex negotiations over carbon trading schemes, which, as with the EU Emissions Trading Scheme, have so far failed to deliver adequate carbon prices.
These are obviously early days for direct extraction technologies, and we should avoid premature optimism, but this could be an important part of the geo-engineering landscape to watch.
 One of the reasons BECCS is controversial is that its justification requires careful analysis of the entire chain of processes involved, starting with the cultivation of the bio-crop and including any ecological or carbon related side effects, as well as consideration of the alternative land uses for food production or other purposes.
 Limits to scale might be imposed, for example, by the availability of other input chemicals to the extraction process. But the more serious limitations are likely to be on disposal of the CO2 gas. A preferred route of extraction might be capture of the carbon in a solid and inert form, such as calcium carbonate, if this were possible.
Sunday, June 25, 2017
Tragic events in the UK in the last week, the Grenfell Tower fire, remind us of the dangers of not paying attention to readily identifiable risks, and avoiding action for the sake of relatively trivial cost savings. Although it is an issue on a much much longer fuse, there are many analogies that should apply to the way we approach the threat of climate change. It’s not a simplistic cost benefit analysis. It’s about possible risks to our survival, at least in the numbers and the style to which we are accustomed today. This means a sensible approach to the avoidance of catastrophic risk. It also means understanding the science, in this case some of the dynamics of climate.
Discussions in one of the recent BIEE climate policy seminars, taken with some of the references that I then pursued, touched on a number of general issues that I have sometimes touched on before in this blog, or which deserve repeat at regular intervals. One is the gross inadequacy of conventional approaches to justification of climate policy in terms of a traditional cost benefit analysis, sometimes grasped enthusiastically by second rate economists as if it were a raison d’etre of their trade. Another is the notion of “tipping points”, associated with particular catastrophic risks to climatic systems, and sometimes ridiculed by climate sceptics; these are essentially points where a small marginal change in one factor, eg temperature, can completely change the dynamics of a climate system. A third is the problem of finding a rational approach to risk uncertainty, and a fourth is the importance of irreversibility. And finally I discovered, buried in an under-reported section of an IPCC report, a simple illustration of why we might want to take seriously the aspiration, from the Paris agreement, for a 1.5o C global warming target.
Let’s start with the illustration, which is a chart showing the pattern of a likely relationship between temperature. The vertical axis is estimated long term sea level rise associated with a given increase in global temperature to a new equilibrium.
Climate Change 2013: The Physical Science Basis. Chapter 13. Sea Level Change
The graph shows a step change in the long term sea level that starts as the global temperature rises. The step change occurs as global temperatures reach about 1.5o C above pre-industrial levels, and adds about five metres of sea level. It is perhaps not entirely coincidence that this is the aspirational target from Paris COP21.
What the chart shows is actually a physical phenomenon that is very easy to explain. It is the melting of land ice, in this case the Greenland ice cap. Up to that point sea level rise is slower and due to other factors such as thermal expansion or glacier melt, as well as smaller land ice reductions. Once the ice has melted it will not reform quickly or easily even if temperature stabilises or falls slightly. In other words the change is irreversible. The change also changes the climate dynamics and accelerates global warming through a feedback effect, as water absorbs more heat than reflective ice cover.
This scale of sea rise, which threatens many if not most major cities, such as London and Shanghai, and countries such as Bangla Desh, as well as much of our most productive agricultural land, might be considered an existential threat to human survival, at least with a continuing population of 8 to 10 billion. Even if this probability were considered quite small, an assumption that is by no means obvious, it is one that most people, facing such a risk in their daily lives, would take a great deal of trouble to avoid. As the simple physics of heat tells us, melting is not an easily reversible process. Land ice melting on this scale would be a catastrophe from which there would be no easy escape.
This is also an where a traditional cost benefit analysis to public policy breaks down. It fails for a number of reasons.
First there is no means to measure the scale of what the costs of serious disruptive climate change might look like, in terms of forced mass migration of hundreds of millions of people, resource conflict, and the destruction of capital assets. Integrated assessment models of the type quoted in the Stern Review, however well intentioned, are simply not fit for this purpose. Second, cost benefit analysis is actually a very limited technique, suitable for the analysis of small incremental changes. It does not deal adequately with radical choices between wholly different paths to the future. Third, it takes no account of inequality. Hardships for poor people are valued less than minor inconveniences for the wealthy.
But most important of all, it depends on the ability to quantify everything, including uncertainty. This is acceptable when it is possible to assign a known probability distribution, but in this context, and many others, that is completely impossible.
This is a field where other professions have long had a more realistic approach. Dr David Hare, a past-President of the Institute and Faculty of Actuaries, puts it very well.
“Climate change is primarily a risk management problem – one of the most important goals of climate change policy should be to limit the probability of a very bad outcome to an acceptably small value.”
The task then is not to find an arbitrary value for a carbon tax, although such a tax is a useful measure. It is to make sure, above all, that a safe policy objective is achieved. 1.5o C, far from being idealistic, may even prove to have been a dangerously conservative target.
 I shall not be specific as these seminars meet under the Chatham House Rule and I prefer to minimise the risk of accidentally ascribing an opinion to an identifiable individual.
Monday, June 19, 2017
Stunned by the range and scale of extraordinary and dramatic events in the last few weeks, this blog has remained very quiet and is only now starting to recover. It will remain quiet and slightly less frequent over most of the summer as the author is also working on some substantial papers about low carbon issues.
But it’s a good time to review quickly some recent events, in terms of their possible implications for energy and climate policy. Some of the themes may deserve a fuller treatment in due course. Some reflect on earlier postings.
Trump. The Trump comedy machine trundles on. Monty Python meets House of Cards is one popular characterisation of recent events (and not just with Trump or the US). But, as I commented earlier in relation to the Paris agreement, the damage of US withdrawal can be exaggerated. It will be limited both by growing appreciation within the US of climate issues, and by the increasing extent to which the rest of the world will simply ignore the US in the framing of its own policies.
The Middle East. Probably of more geopolitical significance are the strange diplomatic initiatives in relation to Saudi Arabia and Quatar. At the very least these risk adding fuel to the flames of conflicts that are already very terrible and will pose problems well beyond their own borders. These are very well explored by David Gardner in the FT.
The Saudis have long so mismanaged their energy resources as to have been forced to consider their own austerity programme, and on current prognostications for oil demand and prices their long term prospects must force some very substantial changes, not least in the very wasteful consumption of energy that has characterised much of the Middle East. We have long thought of the region mainly in terms of its role as a low cost intra-marginal oil producer, but consumption growth has been huge, and it deserves to be taken much more seriously in the broader context of how global adjustments and low carbon policies can be developed. We have to hope this will not be hindered by ill-considered diplomatic and military adventures on all sides.
UK. Bank of England forces financial institution stress tests in relation to climate change. This is another sign that widespread assumption of a low carbon future is gaining traction. Part of this is concern with the liabilities of insurance companies, in relation to some of the bigger risks anticipated from climate change, eg coastal flooding. But another of the Bank’s concerns is with the position of funds that have too much invested in companies that are going to lose out heavily if the world turns even more decisively against fossil fuels. Companies most at risk include coal, especially as the prospects for carbon capture appear to recede. Again this is an issue flagged in an early posting on this site.
And the UK election and Brexit. Direct implications for climate policy seem limited. There is no doubting the multiple close correlations and affinities between the fundamentalist free marketeers, the hard right Brexiters, the Trump camp and fossil fuel lobbies in the US, and refusal to accept the implications of climate science. Politicians like Redwood, Lawson, Trump himself, Farage and UKIP, Rees Mogg and Grayling, together with the small band of pro-Brexit economists, all fit the mould, and the correlations have been noted in earlier postings. But with too many internal battles over Brexit, and the relaxation of austerity, any threats to UK climate policy, its 2050 legally binding targets or its commitment to Paris seem unlikely, for a host of reasons.
Where do we go on liberalised markets? Both major parties went into the election on a platform that included the prospect of price controls for the energy companies. This deserves a deeper analysis, perhaps, but surely marks the death knell of the liberalised market approach in the UK. The UK government, and most other European governments, intervene extensively in the energy sector.
Sunday, May 28, 2017
Apologies to readers for a longer than usual gap. This has been the result of travel commitments and the diversion of my time into writing a rather longer piece for another publisher.
The Trump caravan moves on. The recent G7 meetings are reported to have included tense conversations between Trump and other leaders on climate policies. Hitherto Trump’s lack of consistency on the subject has been encouraging, as campaign slogans promoting coal interests meet some wider global realities. And Trump’s unpredictability (to use a kind word) means that even if he eventually comes down on the anti-science side of the argument, the US position will carry less weight in the rest of the world and is less likely to undermine the Paris agreement.
However it is clear that the “refute the science” camp epitomised by climate sceptics such as Trump and the UK’s own Nigel Lawson is increasingly in disarray. In recent years they have relied heavily on the cherry picking of global temperature statistics purporting to show a pause in “warming” since 1998, an unusually hot el Nino year. The statistical analysis was always laughable, but the last two years, coinciding with another el Nino, have driven the last nails into the coffin of this particular piece of sophistry and spurious argument.
The result is we now see the sceptics retreating to another line of defence, essentially that the outcome of increasing CO2 might not be as bad as predicted and therefore might not justify “expensive” action in mitigation. Jonathan Chait reports one such line in the Daily Intelligencer of 1 May, picking up a column from the New York Times in which Bret Stephens, whom he describes as “a conservative refugee from the increasingly Trumpist WSJ”, argues that the certainty of climate science is overrated, while still admitting the reality of warming and the human influence on it.
This at least is progress of a sort. Pre-election Trump treated the science as one of the great hoaxes of all time, so at least there is some recognition of the science. And it is also true that the science is anything but certain in estimating the climatic impacts and their economic and social costs. However this argument, which is developed to suggest that we cannot afford to abandon or reduce our fossil fuel consumption, ignores the reality that the uncertainties over outcomes runs in both directions.
The problem is the implicit argument that the risk is one-sided. Climate Shock, a 2015 book by two very serious economists, Wagner and Weitzman, argues that we pay too much attention to scientists’ best estimate of the “likely” global warming outturn. What should really concern us is possible underestimation of climate change. The best estimates are both dangerous and expensive. But the more extreme but still plausible possibilities are terrifying, threatening human civilisation in any form to which we have become accustomed and almost certainly implying a massive involuntary reduction in population.
It is also worrying that the evidence hitherto is to suggest that scientists have if anything erred on the side of not appearing to be alarmist, and that their predictions have proved right, within a range of uncertainty, or have underestimated the warming that has actually occurred.
We do not accept a 10%, or even 1%, chance of a fatal outcome when we take a flight. Nor should we collectively accept such risks in forming our energy choices. Nor is the cost of effective action impossibly high (although it might become so if we wait too long). It is broadly assumed to be of the order of 1 to 2 percent of GDP, roughly speaking the equivalent of assuming we might reach a given standard of living inn 2050 instead of 2049. It is also, for individual economies, within the boundaries of impacts (on standard of living) brought about by short term fluctuations in the oil price, or by significant changes in government fiscal policies.
We should expect more dubious arguments along these lines from conservative commentators such as Stephens, Lawson, Trump and others. The ideological objective is small government, and fact and logic are twisted to reach the desired political conclusion.
 Trump, like our own Daily Mail climate science specialist Melanie Phillips, has form on matters scientific, having got into deep water on the subject of vaccination and autism. This is another area where the promotion of absurd and indefensible positions has caused huge social damage, but this blog confines itself mainly to energy matters.
 Climate change prediction: Erring on the side of least drama. Brysse, Oreskes, O’Reilly, and Oppenheimer. Global Environmental Change. Volume 23, Issue 1. February 2013
Sunday, May 7, 2017
Has May pinched Corbyn’s policies (or at least Ed Miliband’s)?
I commented a short while ago (on 25th April) on the very different treatments handed out to the idea of energy retail price caps, depending on whether they were proposed by Labour or Conservative administrations. To recall the discussion.
. The Telegraph said prices would go up before Miliband’s freeze, while the Times and the Sun warned the “lurch to the left” risked blackouts. The Times’s editorial described his plan as “flawed in practically every detail”.  … on Sunday, the Sunday Times welcomed May’s price cap as an “attempt to capture the political centre ground”. [Guardian]
This was a timely posting. The FT reports today as follows. Theresa May said during the Conservative party conference in October last year that she was planning to take action on high bills. Since then, the “big six” power companies have stopped trying to match or better the cheapest deals on the market, according to an analysis by price comparison website uSwitch.
So far this looks like first blood to the Daily Telegraph, as the big energy companies take pre-emptive action to raise prices or at least limit any pretence at aggressive competition. The FT also reports that: Iain Conn, chief executive of British Gas-owner Centrica, Britain’s biggest energy supplier to homes, has said there were people at the heart of the Tory government who “don’t believe in free markets”.
Alternatively this could be interpreted simply as a recognition that in this particular industry, the principles of free markets and competition are beset by so many sources of market failure that some retreat from neo-liberal ideology was inevitable. An energy industry counterpoint came from Paul Massara, former chief executive of Npower, who said free market competition had not so far encouraged the majority of households to switch to cheaper deals. “Free markets haven’t worked and therefore you need to do something. The question is what is the right solution?” [again according to the FT]
Watch this space. There will be many even more significant battles ahead within the Tory party around the broader questions of markets and “working for everyone”. But, I suspect, they will not be of great prominence in this election campaign.
Saturday, May 6, 2017
As the UK moves towards the June general election, there is a widespread assumption of an overwhelming victory for Mrs May’s Conservatives. So it is perhaps time to put a positive spin on this most probable outcome and consider the issues that may arise for UK climate policy.
A very strong personal position for Mrs May, and the crushing of UKIP, will make it much easier for her to agree the inevitable compromises that will be required to secure exit terms that avoid the economic disaster of a no deal exit. Inter alia this is likely to include substantial “divorce payment” even if it is well short of the £ 100 bn plus that is a negotiating position currently hinted at in Brussels. But almost any viable agreement will include other equally substantial disappointments for the diehard Brexiteers.
Energy issues will not be top of the list of problem areas, but Brussels may seek to retain the UK within the EU ETS, ostensibly on the grounds of ensuring “fair” competition in trade. The UK should not resist this too strongly, first because the EU ETS has in any case proved to be a rather ineffective instrument, but more importantly because there are potential longer term advantages to membership of a regional block for trading carbon emissions, should these arrangements ever escape from the cycles of weak adjustment to rapidly changing conditions within an inflexible political framework.
In broader terms the UK would be ill advised to seek to separate itself from continental European systems. Interconnection is a major part of future UK energy plans, and a common basis for trading and interconnection protocols and coordination of interconnection investments has some clear positive benefits to both parties. There are also strong contractual and other relationships in the nuclear industry (including disposal of nuclear waste) which will need to be maintained in some form.
There are signs that Mrs May is moving sharply away from the market fundamentalism that has characterised much of the Right of the Tory party, and especially its members most closely associated with campaigning for Brexit. The evidence for this has been most clear in terms of her ambitions for a government that “works for all of the people”. But its most concrete manifestation to date has been in the threat of a “price cap” for the energy utilities. This would be the death knell for the liberalised market as we have known it.
A further irony has been the revelation that price caps currently apply in about half of other EU countries, indicating (whatever general view one takes on their wisdom) that much or most of the EU has not followed the UK market liberalised market model very far down the road. The UK is retreating further towards a more typical EU paradigm of mixed market and interventionist approaches. All the while the Commission itself has been pushing to move faster to liberalised and UK-inspired “single market” solutions. The irony is that at the point of its departure the UK will actually be moving into closer alignment with its neighbours, at least in terms of its general philosophy.
There have been suggestions that consumer bills will be prioritised over renewables investment. On the other hand a government that works for “all the people” may also be predisposed to projects that can show a substantial wider benefit to the economy. Industrial strategy may be back in fashion, and is unlikely to be directed to new fossil technologies except (just possibly) in renewed interest in carbon capture (CCS). It is more likely that nuclear programmes will be maintained, and projects such as the West Coast tidal lagoons, which can show major external benefits (as well as carbon saving) will get some serious attention.
The negotiations have clearly got off to a bad start, with a trio of apparent incompetents in key roles. This does not augur well for either any sort of agreement, or even less for a “good deal” for the UK. But we have to hope that sense will prevail. If it does, and even though Brexit is not the preferred scenario for most Greens and others engaged with climate policy, then there is no reason to despair of at least some continued progress in UK climate policy.
Tuesday, April 25, 2017
PRICE CAPS. HYPOCRISY GOES INTO OVERDRIVE, BUT ARE WE WITNESSING THE DEATH OF NEO-LIBERAL PRINCIPLES FOR THE ENERGY SECTOR?
As we head at increasing speed for the policy train wreck of the forthcoming Brexit negotiations, the British political class (and MPs by an overwhelming majority) has chosen to divert our attention into one of the most pointless general elections of all time. This will inter alia call a temporary halt to the searching examination of false promises and expectations, and simple untruths, that Hillary Benn’s House of Commons Select Committee on Leaving the European Union has been conducting. Readers not looking for the usual energy policy content of this blog may wish to read no further and refer instead to the Committee’s recent reports. These tend to be understated, but the material is there. In due course we will no doubt learn more about the effectiveness of EU exit in curbing immigration, boosts to our national income, the wonderful new trade deals on offer from Donald Trump, and much, much more.
|POLICY TRAIN WRECK|
However in the meantime the campaign will provide a useful opportunity for our leaders to hide from reality. Nevertheless connoisseurs of duplicity, smoke and mirrors, and hypocrisy, if not satiated by other aspects of the Brexit debate, can still find some rich material in campaign discussions on the subject of energy prices. The subject of energy price caps has come to the fore, just as it did before the 2015 election, with Ed Miliband’s promotion of the idea.
2015. RED ED'S POLITICS OF THE BANANA REPUBLIC. … like the pledge to cap energy prices, [these policies] … merely serve to stoke up the politics of division. [Daily Mail]. “And despite the criticism of many experts, he remains committed to the principle of using State power to cap energy prices, with bills frozen by law until 2017, which strikes me as economically illiterate.” crowed another Mail columnist. BACK TO THE BAD OLD DAYS, the Daily Mail front page had screamed earlier in September 2013 on the same price cap issue. For the Spectator it had been MILIBAND'S LA-LA LURCH TO THE LEFT.
2017. But when the Mail reported earlier this month on Tory plans to take action on bills in the face of the latest rise by one of the big six energy companies, such statist intervention had become CRACKDOWN ON ENERGY RIP-OFFS. The Telegraph said prices would go up before Miliband’s freeze, while the Times and the Sun warned the “lurch to the left” risked blackouts. The Times’s editorial described his plan as “flawed in practically every detail”. [But] on Sunday, the Sunday Times welcomed May’s price cap as an “attempt to capture the political centre ground”. [Guardian]
The ironies in the contradictory treatment of the same policy when promoted by different factions are amusing. But actually there is a deeper significance to this volte face from the party of market fundamentalists.
As it happens I regard the use of price caps as misguided under most circumstances, now putting myself at odds with both Labour and Conservative. Obvious reasons are the risk that interventions confined to price will reduce supply and deter investment, and that it is better to address the disease (market failure) rather than the symptom. Nor do I entirely buy the view that the energy companies are making excess profits (see an earlier posting). But the endorsement by the Conservative party of such a quintessentially statist, interventionist approach signals something more than simple electoral opportunism. It arguably represents the end of the road for the pretences of market liberalisation. This is certainly so in the UK, arguably the pioneer of deregulatory principles and their application.
Network costs, which can account for a third or more of a domestic consumer’s bill, have always been heavily regulated, even after privatisation in 1990. Generation investment is now almost entirely dictated by government, either directly through support for nuclear or renewables, or more indirectly through centrally controlled capacity auctions. The remaining element of the electricity supply chain, retail supply, has always been at best pseudo competitive, but that too is now being taken under the umbrella of government. What all this amounts to is the complete capitulation of the neo-liberal approach, at least in the energy sector.
It is surely time to recognise that this is a sector beset by market failure and that we need, not a series of ad hoc sticking plasters but a complete re-think of how we want the sector to operate and how we can better structure it to use the real dynamics that can come from competitive markets in driving efficiency and innovation. There is no point in pretending that we are still operating a laissez-faire competitive system, or that government can remove itself from the multiple policy choices and commitments that the sector, and particularly a low carbon power sector, will require.
There are further ironies and further opportunities for amusing speculation. The UK is not alone in wrestling with the paradoxes of the flawed neo-liberal paradigm. My last posting discussed a significant issue arising in a German and EU context. The EU followed the UK up the hill of unbundling and market solutions, but at least 15-20 years behind. The dawning realisation in the UK of the need to reverse direction and head downhill will shortly see it meeting an EU still struggling towards the summit.
But will this be an element in Brexit or future trade negotiations? And if we struggle to get back into the EU in (say) 2025 will be obliged to make further reverse policy changes to meet the EU energy sector and competition and state aid rules at that time. Or will the EU by then also have learned something from our experience as well as their own?
 This is after all the party of the ayatollahs of free market fundamentalism such as Redwood, Lawson, Lilley et al.
Tuesday, April 11, 2017
The EU has launched an investigation into German plans to create a strategic electricity reserve, exploring if the measures amount to illegal state-aid that will distort competition in the electricity market. (FT, 7 April 2017)
Prima facie this episode represents a failure to understand, let alone resolve, a fundamental dilemma of electricity wholesale markets. This is a failure that potentially has quite profound implications for the ways in which European reliability standards and security of supply are defined, and for effective governance of the sector. The UK, originally a prime mover in liberalised markets and operating regimes that replaced the old style world of command and control, may think it is immune from these problems in the post-Brexit world. If so it is mistaken. Pressures to remain part of some form of the single market will be intense.
EU competition economists continue to misunderstand some of the fundamentals of efficient electricity markets. Most European markets are already, from the perspective of a free market purist, compromised by numerous policy interventions. From the perspective of theorists of the second best, they are also compromised by the inadequacies of EU efforts to introduce carbon trading regimes that produce a carbon price reflective of the true externalities associated with climate change. While low carbon policy is stuck firmly in the world of the second best, you no longer need to be a Nobel prize-winning economist to appreciate that, in this sector at least, competition policy should be fighting an uphill battle to be taken seriously. This is certainly true from a perspective of maximising public and private good. (Politically the priorities are sometimes different of course.)
But the issue of energy-only markets is, in the context of electricity, even more fundamental. It is a simple to state but quite subtle problem. The efficient operation of energy markets has always been posited on the concept of a merit order of generating plant ranked in order of fuel costs (and in principle other short term variable costs of operation). The most expensive plant required to operate sets a “system marginal cost” and this is the basis for a wholesale market price.
Unfortunately this is a wholesale price that is intrinsically incapable of supporting investment in, or continued maintenance of, sufficient generating capacity to meet peak demands. To demonstrate this one has only to ask what reward be earned by a plant that operates only at peak, and, when it operates, is rewarded only by its own short run marginal cost. There is no reward for this plant, and indeed reliance only on system marginal cost pricing would ensure that all capacity was likely to be under-rewarded to some degree. A preponderance of low carbon plant (eg wind or nuclear), with low, zero or negative marginal cost in operation, will ensure that this issue – “paying for capacity” - is accentuated.
Two types of resolution can be proposed for this problem. The first is a “market” solution that relies on scarcity or supply shortages to raise prices to a sufficient degree to ration demand, and for sufficiently long to induce new investment. This is a “purist” solution that has, unsurprisingly, generally proved unacceptable to regulators and governments. It assumes generators will be “allowed” to make substantial excess profits over long periods (to compensate for the long spells of surplus capacity and ultra-low prices).
The alternative is to instigate some form of capacity market. However this necessarily represents some form of central intervention. Inter alia, within a system of capacity auctions, someone has to decide how much capacity is required, and this in turn requires a view on what is an acceptable standard of generation security and reliability of supply. While we might imagine , and possibly even create, a world where the reliability of the power supply is left entirely to the market, that is not the world we currently inhabit. The German government is quite sensibly taking steps to remedy some very clear deficiencies in the electricity market and to protect its own consumers and industries (and voters).
At the same time it is impossible to imagine, given the interconnections of the German power networks, that an intervention of this kind can take place without having significant effects on wider EU markets. The idea that a strategic reserve can be insulated from the market, or “held outside the market” is intrinsically unconvincing. If used it necessarily impacts prices during the periods of shortage on which investors are relying to recover their capital costs.
We can see instantly why devotees of the single market in energy have objected to the idea of capacity markets. Capacity markets raise immediately the question of who should be responsible for setting the security standard. The standard must surely be common across the whole market to avoid distortions, but who is to set the standard – Brussels or Berlin? Brussels, one suspects, is not yet ready to answer this question. It prefers instead to cling to the illusion that an energy only market can actually deliver reliable secure supplies across Europe without introducing market volatility and price instabilities.
The UK has its own conflicts to resolve in terms of getting markets to work efficiently in support of energy and policy objectives. But interconnection and other trade issues will ensure it is, even post Brexit, unlikely to be immune from the effects of security and market issues within the EU.
 A recent BIEE seminar addressed this subject, identifying the numerous questions that arise for the UK over continued participation in the emissions trading scheme and a range of interconnection agreements.
 We are however indebted to Nobel prize winners for pointing out what may now seem, to some of us at least, simple truths. The subject deserves a much longer posting, but a very quick summary of its flavour can be gained from reading a recent issue of Prospect magazine, and an interview with Nobel laureate Joseph Stiglitz.
Another recognised glitch in the elegant mathematical proofs of the wisdom of the invisible hand was known as “the theory of the second best.” This qualifies the presumption for unfettered markets with the caveat that as soon as you’re dealing with an imperfect world, then there is no guarantee that taking away any single distortion will make things better, rather than worse. [Prospect Magazine. October 2016]
In other words enforcing a rigid competition policy doctrine in a market already massively compromised by the carbon externality, may make things worse. It can and does, as we have pointed out in earlier postings. See for example: EU EMISSIONS TRADING SCHEME AND EUROPE’S CLIMATE POLICY. A FLAGSHIP FLOUNDERING.
 See recent posting. DOUBLE STANDARDS FOR RELIABILITY IN POWER SUPPLIES. NOT SUCH A BAD IDEA.