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 , ,

Cameron should focus on free trade rather than foreign aid

February 17, 2013

The development economist Peter Bauer famously observed that “Aid is the process by which poor people in rich countries subsidise rich people in poor countries.” Indeed there is a wealth of evidence, both theoretical and empirical, that foreign aid is largely counterproductive.

In particular, aid may help to sustain kleptocratic elites that feed off such infusions. Indeed, income is frequently diverted to buy weapons to suppress internal dissent, typically through the oppression of minority ethnic groups.
Foreign aid also tends to distort markets by creating unfair competition and crowding out local suppliers. Currencies may also be artificially inflated, harming exports. And let’s not forget the negative economic effect of extra taxation on donor countries, which in turn harms their poorer trading partners.

Politically, dependence on foreign aid may breed a bureaucratic, centrally planned, top-down approach to economic development issues, when what is really needed is a framework of basic institutions (such as private property) within which entrepreneurship can thrive. Accordingly, it is very difficult to find an example of a country that has achieved long-term economic development through foreign aid.

Yet despite the overwhelming evidence, and notwithstanding the UK’s worst-ever peacetime fiscal crisis, the Conservative Party has announced that if elected it will ring-fence Britain’s overseas aid budget and meet the UN target of spending 0.7% of GDP on aid by 2013.

David Cameron also wants to change the way aid is delivered to make it more effective. But it is surely naïve to think that, despite repeated attempts to solve this problem, aid can somehow be better targeted so that it doesn’t fall into the hands of corrupt elites. Third World politicians and bureaucrats will simply find different ways of siphoning off money.

If the Conservatives really want to help developing countries they should focus on removing trade barriers, particularly those imposed by the European Union, rather than adopting the failed policies of international socialism.

15 July 2009, IEA Blog

Filed under development Tagged with , ,