The sunk cost fallacy

...there is no lack of resources for investment in the UK's energy sector, only a lack of forward thinking. The government is set to heavily subsidise a new generation of nuclear power stations, despite recent reports that decommissioning the existing generation could cost £83bn of taxpayers' money. Investment in renewable and clean energy sources would be a far more productive use of public funds in the long term.

There are several errors to unravel there: of course there is a lack of resources for investment. We cannot invest in everything, we face limits upon all our resources all the time. The question we need the answer to is what is the best method of using our available resources?

It could be that renewables and "clean energy sources" (of which number I would count nuclear as a possibility but still...) are the best use of public funds. It might be that nuclear is, it could even be a network of minions using stationary bicycles to power dynamos. What we need therefore is a system, a method, for working out which of the various available alternatives is indeed that best use of our limited resources.

That method is called a cost benefit analysis: how much will it cost to do something and what is the benefit of our doing so? But the important point is that we start from now: what has happened in the past might be used to guide our estimates of either costs or benefits, certainly, but money that we already have to spend, come what may, should not factor in our calculations.

For money that we already have to spend is a sunk cost. Whether we use windmills, new reactors or those bicycles, we still have to clean up the previous generation of nuclear sites. Whatever we do going forward, those costs are there: thus they should not be used in calculating which path we should follow.

It still might be true that the bicycles are the best option (I certainly don't think so) or the renewables (not with the current generation of technology they're not) but the waving around of that £83 billion figure is simply a distraction, a piece of political shroud waving.

Oh, and one other point. Given that the plan to cover the seas and the hills with windmills is costed at £100 billion, that sunk cost actually looks rather cheap.

Not necessarily a sunk cost...
written by JABITheW, August 17, 2008

...my suspicion is that the costs were mentioned in the context of predicting a future cost, which would form part of the cost-benefit analysis you describe.

different angle
written by Shah Ahmed, August 17, 2008

Same subject, different take. The amount of expenditure needed to fulfill futre supply and demand maybe very high and there may be many different ways fo producing energy however some of the money would probably be better spent on educating the public in consuming less.

Our neighbours in Nordic and Scandinavia seem to be more aware of their natural surroundings then we. little things like hotel lights which switch off when there are no humans present.
Also along the same lines are initiatives to increase the efficiency of our energy consumption, car pooling, Hybrid cars, fuel cell and solar technologies.

Looking only at the production and not the consumtion would mean that we still have the same problems generation after generation.

...
written by PJF, August 17, 2008

"...what has happened in the past might be used to guide our estimates of either costs or benefits, certainly..."

That looks to me to be precisely what Kate Hudson is doing. My reading of her letter is that she thinks it's the subsidies for *new* nuclear power that would be better spent on her preferred sources, using the sunk cost of £83 billion for dealing with the old as part of a cost-benefit guide.

I don't agree with her opinion but I think I comprehend it.

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written by HJ, August 18, 2008

"Whatever we do going forward..."

Tim, what does the "going forward" bit add to the sentence other than making you sound like a mindless corporate executive (which I know you're not).

Kate Hudson's point is that we know from experience that the clean-up costs of nuclear energy have far exceeded the initial costs, so this needs to be taken into account. There may be good reasons why this won't be the case for new power stations (as they can be designed with decommissioning in mind and they produce much less waste anyway).

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written by gareth, August 18, 2008

There is no reason why a power station shouldn't stay where it is after it stops generating electricity. If we declare the nuclear power stations to be Listed Buildings of great historical interest, it will be illegal to spend large sums of money knocking them down and disposing of the rubble.

Uranium and the Bank of England
written by Adrian Peirson, August 18, 2008

The Bank of England is not Englands bank at all, it's a Private Company owned by the Rothschilds who incidentally also own 85% of the Worlds Uranium supplies.

So you see, buy going Nuclear, Brown is ensuring that we not only buy from Rothschilds, we have to pay them to decommision.
It's a win win situation for a few lucky people.