Energy & Environment

Entirely the wrong decision on climate change in Paris

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What is so maddening about this climate change kerfluffle is that everyone, but everyone, seems to be determined to make the wrong decisions, entirely ignoring everything they are being told by the scientific consensus on the subject. There've been a number of reports chewing over what should be done, assuming that the case for doing anything has been made, and they all say much the same thing. That this decision just announced is wrong:

A new UN climate change deal is expected to commit the world to trying to limit global warming to 1.5C - despite warnings the target cannot be achieved because people will never vote for the costly policies it would require.

The highly ambitious goal would require such a radical shift to expensive green energy that it would be impossible in a democratic society, a leading academic warned last night. It would also require as-yet-untested technologies to extract carbon dioxide from the atmosphere, others said.

The point is explicitly made in the Stern Review.Our target, if target there is going to be, should not be any particular temperature nor even level of emissions. It should be the cost of whatever changes we make. This is simply very basic economic reasoning.

If there are to be damages in the future then sure, we should pay some amount now to avert those damages. But obviously, we should not spend more now than what those damages will be: to do so would just be making everyone, present and future, poorer for no very good reason. Thus the most important number we need to know is what is the cost of averting the damage.

To insist that some particular temperature goal, or even emissions number, should be met regardless of the cost of doing so is to invert this reasoning. And given that the original reasoning in Stern (the economic reasoning, whatever one thinks of the climate science underlying the issue) is correct in its logic, this makes setting a temperature or emissions target is just the wrong thing to be doing.

We'd be much more amenable to discussing the climate change issue if everyone wasn't so insistent on applying what we know, absolutely, is the wrong answer to it.

So how does this work then?

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The European Union has announced that there will be, must be, lots more recycling. As we've said for many years now, we're all in favour of recycling that makes a profit. Profit being, of course, the value added by undertaking an activity. We've also been saying, for those same years, that recycling that makes a loss isn't a good idea as what's the point of destroying value, of making everyone poorer? But the EU likes targets and targets there will be and that's that then. But we're still hugely interested in how they're going to pull this particular trick off:

Europe’s throwaway society will come to an end by 2030 under a wide-ranging set of proposals by the European Commission to create what it calls a circular economy.

The plans include lots of recycling to get maximum value out of every raw material, redesigning to make sure what one buys does not become obsolete in a few years; and better design to make goods easy to repair.

It will also set tough targets for countries, including Ireland, to vastly reduce the amount of waste sent to landfills and touch every aspect of life, from fertilisers to food, and cars to washing machines and phones.

The new targets are slated to save consumers and producers billions of euro a year, create jobs and products, and make a real contribution towards protecting the environment and fighting climate change.

Other reports suggest that the plans will create 2 million jobs. And that's the bit we don't understand.

Jobs are, obviously, a cost of doing something. People want to get paid for doing them: and there's only us consumers around to pay them, whether through prices or taxes. So, the plan will mean that we must pay the wages of 2 million more people and yet it's going to save us money?

How does that work?

That's quite apart from the gross stupidity of this:

Changes in the design of products like phones, which contain tiny amounts of valuable but scarce minerals, should also improve Europe’s competitiveness in the battle with China and other countries for a share of these precious products.

The rare earths, which is what they're really talking about, are being given away these days at well under production cost. And global resources of them will last to some point near the heat death of the universe at current consumption rates. We're not even in a battle with China about them either. The whole idea is simply divorced from any form of reality.

Something to remember about COP21

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Jeremy Warner is probably right about the outcome of COP21 here, that great gabfest to talk about climate change:

Ever clearer is that the debate on climate change is essentially over. Whether just a modern day delusion or not, virtually all political leaders now buy into the idea of man-made warming, and most of them seem willing to do something about it.

The question, as always, is what should be done. We have long taken the above view: the truth or not of climate change is not the important point. Politics is about what people believe, not the truth. Thus we've been advocating a carbon tax on the grounds that we know they're going to do something so we might as well tell everyone to do what will cure the problem, if it exists, at least cost. Usefully, it's also what every economist looking at the problem has also said, from Stern through Nordhaus to Tol.

However, there's an implication of that:

Much fiercer carbon taxes are coming, driving huge change not just in energy consumption and production, but in all the myriad industries that depend on hydro-carbons, from plastics to automotive, metal bashing and even many service activities, which can be surprisingly energy intensive.

That's actually not true, not here in the UK at least. Because we largely already have a carbon tax. It's not distributed correctly, this is true (too much on petrol, not enough on farming) but overall we're already coughing up about the "correct" amount as calculated by Stern (and more than Nordhaus or Tol would suggest for today). The combination of the fuel duty escalator, the EU's cap and trade, the minimum carbon price and so on, while they're not quite exactly the way it should all be done, do have roughly the right effect and size. According to Stern's numbers the UK should be paying something like £30 billion a year in carbon tax given the roughly 500 million tonnes CO2 a year. We're already paying that much when you tot everything up so we're done.

Yes, it's entirely true that some other people might have a lot of work to do to meet whatever is agreed in Paris. But as far as the UK is concerned we're done, we've already put the correct and recommended policies into place. We've nothing else that we need to do except perhaps a little tinkering here and there. There's most certainly no justification for significant rises in the general tax level, whatever COP21 agrees. Not that that's what we'll be told of course....

So they've worked out how to do the propaganda then

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This is not quite what people seem to think it is. The report seems to show that people are happy with restrictions and taxes if they are for the common good. Thus we should go and tax meat. But that's really not quite what is actually being said:

Taxing meat to simultaneously tackle climate change and improve global health would be far less unpalatable than governments think, according to new research.

Meat production produces 15% of all greenhouse gases – more than all cars, trains, planes and ships combined – and halting global warming appears near impossible unless the world’s fast growing appetite for meat is addressed.

The new analysis says this could be done through taxes, increasing vegetarian food in schools, hospitals and the armed forces and cutting subsidies to livestock farmers, all supported by public information campaigns.

The research, from the international affairs thinktank Chatham House and Glasgow University, involved surveys and focus groups in 12 countries and found that even measures restricting peoples’ behaviour could be accepted if seen as in the public interest, as was seen with smoking bans.

“Governments are ignoring what should be a hugely appealing, win-win policy,” said lead author Laura Wellesley, at Chatham House.

“The idea that interventions like this are too politically sensitive and too difficult to implement is unjustified. Our focus groups show people expect governments to lead action on issues that are for the global good. Our research indicates any backlash to unpopular policies would likely be short-lived as long as the rationale for action was strong.”

What they have actually found is that if they dress up the policy that they already desire as being something that is for the common good then people will complain less. Something which is obviously true, every orator and politician has known for ever that the more you appeal to peoples' extant prejudices the more ridiculous the policy you can get them to swallow.

What Chatham House has just done is discover how to produce the propaganda for meat taxes, nothing else. And well done them of course, although quite when Chatham House got into the propaganda business we're not quite sure.

So, that DECC's renewables plans entirely up in smoke then

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One of the little fables, falsities really, of the DECC's approach to climate change rests upon just the one number. And that's what is the price of natural gas per therm going to be off into the future. We could assume that the price will be roughly the same as today. Or it might fall as a result of fracking, or it might rise as a result of supplies running out. But we obviously do need to make a forecast because that's the only way we can work out whether those damn windmills and so on are ever going to be economic. So what DECC did was assume that gas prices would roughly double from their current level. In that manner they could then say that those windmills would in fact be cheaper. Not because the windmills are cheaper now, nor because they're going to become cheaper in the future, but because the gas price is going to double.

They were very insistent about supporting this too. We recall one of their pronouncements being that fracking wouldn't reduce the price at all. Because it would all be exported we think was the mantra. Then they said, well, maybe, a few percent reduction: look, here's a report about Cuadrilla's find which says 3 or 4% reduction in price!

Yes, well, that report was actually about the price impact of just he extra gas find that Cuadrilla had announced as the result of just the one borehole: and that price reduction applied to the entirety of the connected European gas market. Obviously the entirety of the Bowland Shale was going to have a larger impact than that.

But everything, the whole shooting match, the entire strategy of solar, windmills, nuclear and everything, has been based upon that one single number: the price of natural gas is going to double.

DECC's latest projections assume average gas prices for this year of 47 pence per therm, down from the 62p it projected last year. It estimates the price will barely rise over the next four years, remaining at just 49p/therm in 2019, and only ticking up slightly to 52p/therm in 2020. A year ago it had expected prices of 60.3p/therm in 2020, while two years ago it was forecasting they could hit 73.8p/therm.

Ooops! And of course the decline in price is being driven by that fracking that would never affect the UK price. Tight oil fracking in the US has driven down the oil price, to which many gas contracts are linked, and gas fracking has increased the amount of LNG sloshing around the world markets. These price decreases being before anyone's even considered whatever may be fracked right here at home.

The entire strategy thus needs to be re-examined. Starting with those numbers for what the future price of gas might be.

And of course, this is also why planning centrally of anything doesn't work. Here it's obvious that, to put it at its most kindly, people became wedded to a particular analysis and simply did not want to hear of changes to it (less kindly they manufactured that analysis to order). But even when that does not happen, we still end up with a plan which depends upon the assumptions which go into it. Rather than leaving things to market forces, which means that we get a multiplicity of plans, with a multiplicity of such assumptions.

Yes, it's true, climate change isn't a problem that entirely pure markets are likely to solve, involving as it does externalities. But that's why the correct answer is to intervene in the market price, add in that externality, and then still have the markets with their mulitple answers and assumptions. Rather than the monolithic central plan reminiscent of Stalinism. Which has just failed as did that Stalinism, reality having to intrude.

The Overseas Development Institute is as stupid as the IMF

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Or maybe they're being deliberately misleading. Back in May, Sam wrote a barnstormer in The Telegraph refuting an IMF report that called it a 'subsidy' when the government didn't tax oil and gas as much as the IMF would have liked it to. This report was important because the IMF is taken seriously, especially by those who don't usually find themselves on its side, when it says stuff they like ('even the IMF' etc). Sam made the obvious point that a subsidy is a subsidy and not taxing something is never a subsidy, even if you think we should—even if your model says that it should—tax that thing more to increase social welfare. If it were a subsidy to tax something (like fossil fuels) below the optimal amount, then it would also be a tax not to subsidise something (like basic research) the optimal amount. But it's not; it's patently, blatantly, ridiculous and obfuscatory use of language.

We might have thought the issue was put to bed. But here we go again, this time with the Overseas Development Institute's new report, which tells us:

While other nations have responded to the drop in energy prices by reducing fossil fuel consumer subsidies, the UK has reduced taxes on fossil fuel production, increasing subsidies to fossil fuel producers.

The industry pays £30.1bn in total taxes, including downstream levies like fuel duties, but since this is not £35bn or £40bn, it's being 'subsidised' according to the IMF and ODI.

It gets onto actual things we might call 'subsidies' later, and they are as piffling as you might expect, given how they are buried:

The International Energy Agency (IEA) estimates for budgetary support for R&D to all fossil fuels in the UK were $76 million in 2013

Note the units.

In addition, the UK government has committed to providing significant direct support for the development of CCS. The largest commitment is for the $1.6 billion for the Commercialisation Programme, although this has not yet been disbursed.

OK, this is a real subsidy, and of a significant size (but nothing compared to oil and gas tax contributions!), but you might note that (a) it's not been paid yet; and (b) it's specifically tied to abating emissions!

So this is a non-story. The real story is 'the energy industry pays a large amount in tax, slightly lower this year, but probably still enough to cover its externalities, and even if it wasn't it's certainly not a "subsidy"'.

And the ODI are as stupid as the IMF.

UPDATE: Turns out the WTO uses the 'tax break = subsidy' definition too; it's still not clear this is a useful or meaningful definition—it requires an idea of the relevant baseline.

Power Up: The framework for a new era of UK energy distribution

The UK's energy market is unfit for the modern age, a new report from the Adam Smith Institute argues. The report, Power Up: The framework for a new era of UK energy distribution, argues that new technologies such as smart grids and distributed energy production can revolutionise old models of energy distribution and pricing, in the same way that apps like Uber are disrupting traditional models of transport.

In a world of expensive of energy prices, the report suggests regulators should encourage experimentation with new technologies, rather than cutting them off at inception. Regulating the market too heavily - often justified by claims that consumers are being 'ripped off' or overwhelmed by the number of tariffs available - closes down consumer experimentation and prevents technological and economic progress, which keeps energy prices high.

The paper envisions a world of choices in the energy market; where smart meters that relay real-time price changes to encourage better energy use are just the beginning. The author, Dr Lynne Kiesling, imagines consumers being able to see where their energy is coming from, and to choose what kind of green-grey energy mix they want.

Most important, Dr Kiesling argues, is for OFGEM to adopt a structure of 'permissionless innovation' - which allows companies to experiment freely without being granted permission from regulators. In the early days of the internet, no-one envisioned a world of Amazon, iPhones and Uber; but these inventions were able to thrive, as there were not limited by regulatory barriers. OFGEM, Kiesling argues, needs to adopt a more relaxed regulatory structure that dismantles the barriers that have been created.

Read the full press release here.

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@old.adamsmith.org | 07476 915072

Shocker as Guardian letter writer doesn't quite get it

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We find this extract of a letter to The Guardian as being a very fun example of people not quite getting it:

The decision to remove availability of tax reliefs for community energy projects (Government to cut tax relief for community green energy schemes, theguardian.com, 28 October), coming at the same time as it is clearing the way (contrary to pre-election pledges) for privately owned, profit-driven fracking businesses to operate wherever they choose, makes explicit the governent’s preference to allow private equity, venture capital and hedge funds to profit rather than allow individuals and families to invest in their own communities.

The not quite getting it bit is of course that those community energy projects were driven by exactly the same profit calculations as those for profit fracking companies are using. After all, all a company is is a group of people banding together to achieve a task: just as a community project is a group of people banding together to achieve a task.

Well, at least we assume that the community projects were motivated by that same calculus: we don't think the British people are stupid enough to do things which don't make them better off.

And the fact that tax reliefs are considered important shows that money is indeed considered to be important. If people were doing these community projects purely for the love of Gaia, with no regard to gelt and pilf, then they would not be concerned about the tax position, would they?

Further, the removal of those special tax reliefs leaves such community projects free to compete with profit driven groups upon entirely equal terms. And, if as could be possible, people are more motivated by stupidity Gaia than by profit, then they'll even have an advantage in the financing of their fracking rigs.

And we are really sorry to have to point this out but creating a level playing field does not prevent anyone from joining in the game.

This isn't a surprise

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Geoffrey Lean gets all excited over in The Telegraph:

Spread the good news: growth does not have to mean destroying our climate A new report shows Britain achieved the greatest cuts in carbon per unit of GDP ever recorded by any country. There is hope for our planet

Well, yes, anyone who had been paying attention knew this already.

Nevertheless, we may yet look back on 2014 as the turning point, the moment that it became clear – beyond doubt – that economic growth need not endanger the climate. In truth – despite commentators' almost unanimous, if erroneous, assumption – growth does not depend on using more energy. Indeed, he British economy has grown by some 270 per cent since 1965, but at the same time its energy use actually fell - from 196.8 million tonnes of oil equivalent then, to 187.9 million now. Yet, in that half century, the number of cars on our roads has almost doubled, while the array of electric gadgets in our homes has proliferated.

The reason we know this already is because it's an assumption that is made in the models that tell us about climate change.

Just to recap. All of the computer models the scientists are using lie atop an economic model. It is necessary to guess at how many people there will be in the future, how rich they will be and what energy sources they are using to power that civilisation. Only then can any calculation of what emissions will be happen, the results of which can be fed into those computer models. And the originals of those models were the SRES. One the families of possible outcomes assumes this:

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%.

Decent economic growth combined with a decline in energy intensity. Exactly the process that Lean is getting so excited about. The underlying economic processes in this family of models are that of continued roughly capitalist and roughly free market globalisation. That is, the continuation of the trends of the second half of the 20th century throughout the 21st. And those growth and energy intensity rates are simply straight line projections into the future of what happened in the past: straight line projections being usually the most accurate economic forecasts. Tomorrow will be much like today and so on.

And the projections go further. In this assumed world, if we start to double the portion of energy that we get from coal (an absurd assumption even on the face of it) then we are in A1FI, a world where climate change is a large problem. And if we continue to develop and adopt renewables, at roughly the same speed as we did in the late 20th century (note, it does not need to be as fast as in the past 20 years) then we are in A1T and climate change simply isn't a problem.

That is, we assumed, predicted, calculated even, 25 years ago that globalised capitalism plus a bit of technological advance would mean that climate change was not a problem. Lean is now getting all excited because globalised capitalism plus a bit of technological advance is going to make climate change not much of a problem.

It would have helped if he'd been paying attention from the beginning really.

Do also note the implication of this. This meeting of all the grand Pooh Bahs coming up in Paris doesn't matter a damn. Because the problem is already being solved by globalised capitalism plus a bit of technological advance: as the entire climate change juggernaut actually assumed it would 25 years ago.

Some subsidies are not like other subsidies

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Austin Healey is arguing that the solar feed in tariff should stay at some gloriously elevated level because:

Mr Healey visited 10 Downing Street to argue the case for a U-turn of the proposed changes last week. The Government currently spends £26bn a year subsidising the fossil fuel industry and £3.5bn on solar: “We think the drop in the tariff is draconian,” said Mr Healey.

The Telegraph helpfully linking that statement to this excellent piece by our own Sam Bowman.

When you read the report, it becomes clear pretty quickly that the IMF’s definition of a subsidy is a little different from everyone else’s. Usually, subsidies describe the government paying money to a firm or industry to encourage production, ostensibly to reduce prices for consumers. Think of the EU’s Common Agricultural Policy, or the cash given to the British steel industry during the Sixties and Seventies. These are unpopular with economists. Subsidies end up making firms bloated, inefficient, and more interested in satisfying government bureaucrats than their customers. And those customers still end up paying for those subsidies with their taxes. But the IMF’s idea of “subsidies” to fossil fuels refers to something completely different. They have taken the indirect costs to society of using energy – air pollution, traffic congestion, climate change – and, if governments haven’t imposed special taxes on one, called it a “subsidy”.

That is, Healey's statement is not actually true, not within the normally accepted meaning of the word "subsidy".

But there's more to it than that. The government does not in fact spend £3.5 billion a year subsidising solar. Rather, it insists that solar should be able to overcharge us for their production. And what is being decided now is that that insistence on the consumer being gouged is to end, or at least decrease.

Yes, it's very definitely a subsidy, a subsidy arising as a result of government action, but it's not government spending upon such subsidy. It's government market rigging to provide it. And the equivalent sum over on the fossil fuel side is, in the best gloss one can put on it, an absence of government rigging the market to account for externalities.

Not all subsidies are the same.