Markets make us greener

  When it comes to Pigouvian taxes, like taxes for car emissions, it is thought by some that they are primarily stealth methods for generating government income under the pretext of positive change. So the theory goes, politicians are using a ubiquitously held public view (that we seriously need to become greener) and capitalising on that with green taxes. I don’t have much of a problem with most green taxes – taxing extra on car emissions because it incentivises people to care about cleaner air by caring more about their car tax bill does, in effect, resemble the market.

Alas, there are lots of people who think it is only politicians who can engender this change to make us greener. I think this assumption needs correcting. Although Pigouvian taxes bring in revenue for politicians short-term (for a few decades maybe), the long-term indicators are that the market left to run by itself will naturally make us greener anyway. The reason being: businesses are already looking for the most efficient means of supplying customers using as little energy as possible, because in a highly competitive market it is in their interest to do so to remain profitable. The goal to reduce energy output can, and has, come in various ways: replacement of human energy for machines, replacement of metal-based technology for higher intensity resources or carbon-cased materials, replacement of paper for digital devices, and so forth – and these are improvements in production that naturally improve business’s cost-effectiveness.

Consequently, compared with how the market engenders continually increased efficiency, emission taxes probably will turn out to have had only a much more negligible effect on lower energy output and more efficient use of resources than the free market, because the market is driven by efficiency far more than politicians with political interest. If there is a race to make us greener, politicians are more like the tortoise and the market is more like the hare.

Some ideas do take a long time to be discovered, don’t they?

Owen Paterson is telling us all about a lovely new idea:

For the past 50 years the environmental movement has been in thrall to a simple, powerful and utterly wrong idea: that the best way to save the planet is to curtail human activity, whether in the form of breeding, building, burning or business. Anybody who suggests a different strategy – that economic activity is not just compatible with environmental benefits, but vital to creating and improving them – has been howled down.

But that is changing, and a new idea is gaining ground, under the term “Ecomodernism”. The key idea behind Ecomodernism is that the more technology human beings adopt, the more they can decouple from dependence on the natural environment and live lives that are prosperous but green. The great Green Blob that dominates the public and NGO sector, whose reactionary tendencies I referred to when I left office as Environment Secretary last year, still refuses to recognise this.

That phrase, Great Green Blob, needs a bit of work before it’s going to become a propagandistic rallying cry we think. And while we obviously agree with the basic thought, given that we’ve said as much ourselves repeatedly, we’re not quite sure it’s a new idea. Not just because we’ve said it before, but because it’s in the very foundational document of the whole global warming movement. That document being the special Report on Emissions Scenarios, the economic models that tell us how many people there will be, at what level of wealth, using what technologies, thus giving us the emissions levels that can be fed into those computer models.

And here is what the SRES says about a richer, higher tech, world:

In the A1 scenario family, demographic and economic trends are closely linked, as affluence is correlated with long life and small families (low mortality and low fertility). Global population grows to some nine billion by 2050 and declines to about seven billion by 2100. Average age increases, with the needs of retired people met mainly through their accumulated savings in private pension systems.

The global economy expands at an average annual rate of about 3% to 2100, reaching around US$550 trillion (all dollar amounts herein are expressed in 1990 dollars, unless stated otherwise). This is approximately the same as average global growth since 1850, although the conditions that lead to this global growth in productivity and per capita incomes in the scenario are unparalleled in history. Global average income per capita reaches about US$21,000 by 2050. While the high average level of income per capita contributes to a great improvement in the overall health and social conditions of the majority of people, this world is not necessarily devoid of problems. In particular, many communities could face some of the problems of social exclusion encountered in the wealthiest countries during the 20 th century, and in many places income growth could produce increased pressure on the global commons.

Energy and mineral resources are abundant in this scenario family because of rapid technical progress, which both reduces the resources needed to produce a given level of output and increases the economically recoverable reserves. Final energy intensity (energy use per unit of GDP) decreases at an average annual rate of 1.3%. Environmental amenities are valued and rapid technological progress “frees” natural resources currently devoted to provision of human needs for other purposes. The concept of environmental quality changes in this storyline from the current emphasis on “conservation” of nature to active “management” of natural and environmental services, which increases ecologic resilience.

A richer world is a greener world: exactly what Paterson is saying. But this isn’t anything new at all, the SRES is a quarter century old. It is also, as above, the document that feeds into the whole IPCC process. It’s not just that this is a possibility, this is an assumption that has been made before we ever started worrying about Flipper boiling alongside that last ice floe.

To our mind this is the most important part of it. If one abandons this assumption that this richer world will be that greener world then one must abandon all of the research that is based upon this assumption. Which means, really it does mean, each and every piece and part of the current global warming hypothesis. Because that entire edifice has indeed been built upon this assumption: the other economic models, for example the A2 one upon which the Stern Review is based, show that a less rich world is also a less green one.

And what’s really lovely about these models is that if we follow the B2 path, less globalisation, more localisation, much slower economic growth, essentially the Green manifesto, then the outcome is even worse. And these are not some rogue models: they are the very assumptions that the entire structure is built upon.

How’d’ye like them apples?

At last, now we know what’s too expensive for renewable energy

An interesting article in The Guardian insisting that the Swansea tidal barrage should be junked. Not that they quite put it that way but that is what their argument means. What they’re actually saying, these Green glitterati, is that the Hinkley C reactor should not go ahead:

So how do the operators, the French company EDF, expect Hinkley C – even if it can be built – to be economically viable? By extracting from the government a price guarantee of £92.50 per megawatt hour for the electricity it produces, index-linked for 35 years.

This is simply astronomical. It is more than twice the current wholesale price of electricity, and more than the government is now paying for solar power, whose costs are expected to fall greatly during the lifetime of the nuclear plant. Against current prices, the government’s guarantee represents a subsidy of over £1 billion a year.

OK, let’s accept that that is too expensive. And that the usual argument, that prototypes always cost more doesn’t really work here:

EDF argues that, as it learns from experience elsewhere, the cost of construction will come down. But the problem with the design is that these plants have to be built almost entirely on site, so each power station is, in effect, a one-off. The costs of technology fall when modular construction is possible: turning out identical units in a factory.

Fine, let us, as usual, accept their arguments at face value and then consider the implications of this. For example, Swansea:

Mandarins from the Department of Energy and Climate Change (DECC) and the Treasury are poring over the details before deciding whether it should be funded though a ‘contract for difference’ scheme.

The cost of lagoon power – a predicted £168 per MW/hour – is considerably higher than for offshore wind, or the £92.50 for nuclear.

If £92.50 is too high then £168 is definitely too high, isn’t it? Thus, based upon the impeccable logic presented to us by Mssrs. Lynas, Monbiot and Goodall, the Swansea Barrage scheme is a dead duck, isn’t it?

We look forward to these fine gentlemen making their opposition clear in due course. For, as they say:

Yes, we are still pro-renewables. But not at any price.

New ASI Paper: “Utility Gains: Assessing the Record of Britain’s Privatized Utilities”

A new Adam Smith Institute paper, “Utility Gains: Assessing the Record of Britain’s Privatized Utilities” assesses the various utility sales of telecoms, gas, water and electricity companies during the 1980’s and 1990’s and looks at how government, shareholders and customers fared since the privatisation process. The paper argues that the following benefits occurred for each stakeholder:

For the government – various general benefits accrued, such as a pronounced surge in investment. It benefited financially, both from one-off sales proceeds and from ongoing sizeable Corporation Tax receipts.

For shareholders, like pension funds, have generally done very well, with many privatizations – particularly the 12 RECs – heavily outperforming the FTSE 100. Privatized water stocks, too, have powered ahead. There are a few notable exceptions to this, such as Railtrack, British Energy and British Telecom.

For utility customers the financial benefits have been less tangible – in a period of massively rising wholesale prices there has been little to pass on. But investment has been much higher and much-needed improvements in customer service have been developed. Telecoms prices have actually fallen materially, while domestic gas, water and electricity prices have all risen sharply in real terms. However, domestic energy prices have risen mainly due to much higher wholesale gas costs – not because of private sector ownership.

The paper finds investment in utilities is now much higher than before privatization, especially in the electricity distribution and water sectors. In the latter case, substantial real price increases have helped finance this investment which had been woefully inadequate prior to privatization in 1989. Over the 25-year period, roughly £110 billion has been invested in the water sector, with the overwhelming majority of this sum being spent by the ten privatized water companies. Currently, over £4 billion per year is being invested.

The paper argues that the privatisation of utilities also created an innovation spike, specifically in the telecoms sector. Privatising British Telecom in 1984, it argues, created a new industry as the staid former Post Office subsidiary started to participate in an international marketplace, in which mobile telephony was developing at a rapid pace. Within a few years, Vodafone had become the pioneer of mobile telephony to such an extent that, by 1999, it had become the fourth most valuable company in history within just two decades of its founding. Had British Telecom remained state-owned, it is probable that the broadband rollout would have been delayed even further.

Click here to read the full press release.

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: | 07584 778207.

There’s not really $22 trillion in savings from giving cities lots of money

Another day, another new report on how if we just spend squillions on pet schemes then more than squillions will be saved and we’ll all become rich! As reported:

Putting cities on a course of smart growth – with expanded public transit, energy-saving buildings, and better waste management – could save as much as $22tn and avoid the equivalent in carbon pollution of India’s entire annual output of greenhouse gasses, according to leading economists.

So, to the report itself:

Even with this focus on the low-carbon options that could be adopted or promoted by local government, and with conservative
and time-limited estimates of costs and benefits, the analysis finds a compelling economic case for significant low-carbon
investment in cities. In the “medium” scenario, the gross global costs of these investments would be US$977 billion per year in
2015–2050 (equivalent to 1.3% of global GDP in 2014), but they would reduce annual energy expenditure by US$1.58 trillion
in 2030 and US$5.85 trillion in 2050 (see Table 2 for further information).

Well, yeees. We would rather like to see this benchmarked against the predicted costs and benefits of earlier schemes and their out turns. Given the rather large variance between predictions and outcomes we’re not convinced that a 1.5 return is enough to span the gap on what people have been given the money to do so far. But we’re afraid that this report does get worse than this:

Beyond those built into the International Energy Agency (IEA) 4DS scenario, this estimate of carbon saving potential does not
take into account rebound effects, where savings from improved energy efficiency are used to access more energy services
rather than to achieve energy demand reduction.

Ah, yes, so we’re aware of the Jevons Paradox, where greater energy efficiency leads to greater energy use because it’s cheaper, but we’ve decided not to include it because it makes our sums look bad. And:

While we must acknowledge potentially significant
opportunity costs,

They don’t include any opportunity costs at all in their calculations, that is their full acknowledgement. And an economic report that doesn’t consider the most important part of economics isn’t worth the paper this report isn’t printed on, is it? Finally:

The main findings are based on a central or “medium” scenario where real (i.e. after inflation) energy prices rise by
2.5% per year, real interest rates are 3% per year, and the technological learning rate for each measure is low.

That is, we’ve magicked in that all this new technology will be really easy to work out and install (umm, like Edinburgh’s tram for example?) and energy is going to rise in price really strongly off into the future. Do note that that assumption about energy prices makes energy double in price every 28 years. Not, to put it mildly, the experience of the past couple of centuries where, with blips of course, energy has been getting cheaper. Seriously, their model says easy alternative technology and vast energy prices: why would any action other than market forces be needed in such a scenario?

So, grossly unrealistic assumptions, a determined ignorance of the two main economic points that should be under discussion and even then a return well under the ability of the public sector to screw things up….well, would you invest on this basis?

Finally, two things. Firstly, if energy is going to go up in price in that manner then absolutely no public action is necessary. Because a doubling of real energy prices every generation will mean that people will quite naturally move to different technologies. And secondly, there’s absolutely nothing here that could not be better achieved by instituiting a carbon tax, so as to move prices to make sure that people do indeed do so.

No, we think not. Into the roundunderthdeskreportfile for this one.