Picking winners and nuclear power

February 17, 2013

Faced with ambitious climate change targets, the government has decided that nuclear power will play a leading role in supplying the UK’s future electricity needs. Ten new plants will be built in the next decade or so, which should provide about a quarter of total supply.

The nuclear option appears to be far more sensible than an equivalent expansion of wind power. Indeed, the unreliability of wind energy means that it must be backed up with conventional capacity, while its dispersed geographical distribution imposes additional costs on the network infrastructure.

Yet nuclear has its own problems. If the new plants are built on schedule and on budget then the impact on electricity prices is likely to be relatively small. Historical experience, however, does not support such optimism.  

Britain’s previous nuclear programmes were economically disastrous. They were plagued by delays, cost overruns, and design flaws. In today’s prices development losses amounted to at least £20 billion, while decommissioning may end up costing another £75 billion.

It is quite plausible that the latest plans will face similar problems. If capital costs rise significantly there will be upward pressure on bills. As a result of political obstacles to new fossil-fuel plants, there is also a severe danger that electricity prices will be pushed higher still by an artificial shortage of capacity if there are delays to the nuclear plant coming onstream.

Then there is the risk borne by the taxpayer if nuclear consortia run into financial difficulties. Given the centrality of the programme to environmental policy, the government will be obliged to ensure construction is completed at almost any cost. And, of course, the difficult-to-price long-term burdens of decommissioning and waste-storage will be loaded on to the taxpayer or electricity consumer.

If the government is determined to reduce carbon emissions then it would surely be more cost effective to set a general framework within which energy companies would be free to choose the most efficient methods of generation. The well-known economic calculation problems facing central planners and the powerful role of special interest groups mean that policies based on micro-management and picking winners are almost always unsuccessful.

1 December 2009, IEA Blog

Filed under energy Tagged with , ,

Should the UK introduce a carbon tax?

February 17, 2013

Earlier this month, President Sarkozy announced plans to introduce a carbon tax in France. The UK could follow suit. A widely applied new tax, justified on environmental grounds, could prove popular with politicians seeking to address unprecedented levels of government borrowing.

Yet there are strong economic objections. In particular, given the economic and scientific uncertainty on the effects of climate change, together with the essentially individual and subjective character of environmental costs, the setting of a carbon tax rate would be almost entirely arbitrary.

Nevertheless, in the context of the government’s broad objectives on climate change (however misguided), a carbon tax could be a rather less harmful way of reducing emissions than the sector-specific tinkering that has characterised recent British policy. Examples of the latter include the renewables obligation in the energy sector, bus and train subsidies in transport, higher motoring taxes, forced recycling and tight regulation of the waste sector, as well as draconian planning controls. The current approach has imposed enormous costs on the affected sectors, subjecting them to a high degree of bureaucracy and central planning.

In theory, a carbon tax could avoid this kind of damaging micro-intervention and help ensure that cuts in emissions took place in a relatively cost-effective manner. But such benefits would require the tax to be applied evenly across all sectors responsible for greenhouse gas emissions and for the existing mish-mash of climate change policies to be phased out.

In practice, however, implementation is likely to be driven by interest-group politics and the tax-raising imperatives of the Treasury. Accordingly, a new tax would almost certainly be overlaid on existing taxes and subsidies.

Motorists would therefore continue paying high rates of fuel duty on top of any new carbon tax, as well as additional costs resulting from the forthcoming inclusion of road fuel in the EU Emissions Trading Scheme. In contrast, bus and train operators would probably require additional government support to help them pay the new tax burden – a case of taxpayers subsidising emissions.

The position of domestic energy consumers is a particular problem for policymakers. In another example of inconsistent policy, they currently enjoy a reduced rate of VAT on fuel. Indeed, If there is the political will to introduce a carbon tax, then it would be better to charge full VAT on domestic fuel consumption (and public transport) instead. However, in the context of concerns over “fuel poverty”, abolishing the concession could be politically difficult and imposing an additional tax almost impossible.

In conclusion, the politics of energy and transport mean that a carbon tax would probably not be applied consistently and that existing bureaucratic control would remain in place. Thus the new tax could end up aggravating existing distortions and would perhaps do little to ensure that emissions reductions were achieved at low cost.

24 September 2009, IEA Blog

Filed under environment Tagged with , ,

The dark side of climate change policy

February 17, 2013

The government recently announced a series of measures designed to make Britain a low-carbon economy, including a large expansion of renewable energy (primarily wind), grants for better home insulation and a so-called green transport strategy. Under the Climate Change Act, the UK is “legally bound” to reduce CO2 emissions by at least 26% by 2020 and 80% by 2050 (relative to 1990 levels).

Meeting such ambitious targets will require substantial investment and while ministers have emphasised alleged advantages, such as the creation of 400,000 “green jobs”, there has been little acknowledgement of the wider economic impact.

Higher energy bills and transport costs are likely to be devastating for many businesses. Some enterprises will be forced to close. Others will relocate to locations where energy and transport are cheaper and environmental regulations less burdensome. In some instances, potential entrepreneurs won’t even bother starting new ventures in the UK. Overall, jobs are likely to be lost rather than created.

Then there is the impact on the less well off. People on benefits, for example £64 per week Jobseeker’s Allowance, may already be using around one third of their (non-housing) incomes to pay utility bills inflated by existing environmental policies.

If this share increases further, there will be strong pressure to raise welfare benefits and winter fuel payments to compensate. Taxes will have to rise accordingly and the already weak incentives to enter low-paid work will be further undermined.

However, the most devastating impact of climate change policy is likely to be on the developing world. While some middle income countries may benefit initially from the flight of businesses from rich nations, it is unrealistic to think that a large upward shift in the level of political control and central planning can take place in the West without negatively affecting the Third World.

The resulting misallocation of resources will hamper entrepreneurship and innovation leading to reduced wealth creation. And restricted and constrained markets will inevitably limit the opportunities for trade, thereby hindering economic development.

The impact of climate change policy therefore goes far beyond landscapes ruined by wind turbines and higher electricity bills. Big cuts in CO2 emissions are likely to prolong the misery of hundreds of millions of the world’s poorest.

29 July 2009, IEA Blog

Filed under development, environment Tagged with , ,