This is for a number of reasons, including the basic problem of cost (although £1-2 billion for a technology that may save the planet and create a major industry for the UK doesn’t seem that much) and public acceptance. But as I am currently reading Catherine Mitchell’s excellent book on the Political Economy of Sustainable Energy, another dimension of the problem also strikes me.

Catherine’s analysis of the UK energy system, and the underlying reason for its inability to handle system change, is that it is managed within a “regulatory state” paradigm. She takes this concept from Michael Moran, who developed it to describe the way the state developed under Thatcherism and following privatisation (a process also picked up on by Dieter Helm, as I blogged on recently). the point about Britain’s regulatory state is that it has come to manage sectors of the economy like energy through arms length regulation. This has worked reasonably well for containing costs through sweating assets, but less well for maintaining investment and absolutely not well for innovation, especially in areas (like CCS, but also including smart grids or even offshore wind) where costs are not really known by the private sector itself.

To be more effective on an issue like CCS, requiring coordination and working more closely with the private sector to discover costs, a different kind of state is required, following a different type of policy. Such an approach has been described by Harvard economist Dani Rodrik, based on his observation of successful industrial policy (which he argues is simply a version of innovation policy) around the world. As he puts it:

“…the right way of thinking about industrial policy is as a discovery process – one where firms and governments learn about underlying costs and opportunities and engage in strategic coordination. The traditional arguments against industrial policy lose much of their force when we view industrial policy in these terms. For example, the typical riposte about government’s inability to pick winners becomes irrelevant. yes, the government has imperfect information, but…so does the private sector. It is the information externalities generated by ignorance in the private sector that creates a useful public role-even when the public sector has worse information than the private sector.”

Crucially, this kind of problem requires a different relationship between public and private sectors:

“Similarly, the idea that governments need to keep private firms at arm’s length to minimize corruption and rent-seeking gets turned on its head. Yes, the government needs to maintain its autonomy from private interests. But it can elicit useful information from the private sector only when it is engaged in an ongoing relationship with it.”

This, of course, is precisely what the regulatory state model can’t do, and is why it has found it so hard to generate innovation in the energy sector (where the private sector does not do on its own). This is true not only in CCS but also in smart grids, where a similar arm’s-length competition (the Low Carbon Network Fund) has been awkwardly placed within a regulator (Ofgem) whose historical remit and culture has been about keeping prices low, not stimulating innovation.

This is not to say that a regulatory state might not get there in the end, more to say that the sense in which the UK’s institutions governing energy are not aligned for innovation goes very deep. Which is just the theme of Mitchell’s book.

In the year that sees a major international conference in Rio on sustainable development, cuts in fossil fuel subsidies would be very welcome. Global spending on such subsidies may be in the region of $600 billion this year, and they make dirty fuels like oil and coal cheaper – a sort of negative carbon tax. Moreover, they use up vast sums of public money that could be spent on health, education or infrastructure. Last year an estimated 20% of government spending in Indonesia went on fossil fuel subsidies, and in some Indian states, an even higher proportion goes to keeping coal-fired electricity cheap. This represents a vast potential development dividend.

Even worse, most of the benefits usually flow to the middle classes, who consume most of the petrol and electricity. Of the $22.5 billion spent by India on fossil fuel subsidies in 2010, less than $2 billion benefited the poorest 20 per cent of the population, according to International Energy Agency figures. The situation in Indonesia, Thailand, Pakistan and South Africa was similar and that in China only slightly better.

So on paper fossil fuel subsidy reform looks like an easy win-win policy for both the environment and development. But in the real world, as recent experience in Nigeria and Indonesia shows, the politics are much more complex. One striking fact is that protests are led not by the better off who gain most from subsidies, but by groups that are poorer (although not so poor that they find it too hard to organise protests). This is because subsidies matter proportionately more for those on low incomes, especially when the indirect effects of increased transport costs work through to prices more broadly. Second, while cutting subsidies may in theory free up resources for public goods, in many cases people have little confidence that this will happen given high levels of corruption. In Nigeria, poor people see subsidies as the only benefit they get from the country’s oil wealth. A third issue is that political parties have got used to deploying subsidies as a political tool, trying to wrong-foot opponents – a game that is currently being played out in the Indonesian case.

So all in all it is not too surprising that although the G20 governments pledged action to reform fuel subsidies in 2009, little has happened since. It is also unlikely that grand statements about sustainability emanating from the Rio+20 summit will have much effect. But what will, and what is clearly driving events in Nigeria and Indonesia, are rising oil prices. These are now reaching historic highs in real terms and the fiscal burden of fossil fuel subsidies (especially for oil and gas) is becoming untenable in a number of countries. There is a big opportunity here, but there are also big political risks. What is lacking, and what no amount of declarations on new “sustainable development goals” will provide, is a credible political strategy for fossil fuel subsidy reform at national level.

In the first three decades of the post-war world, the (mainly Keynesian) state was concerned with managing the business cycle, organising transfers from rich to poor and providing public services. Following the crisis of the 1970s, a shift of focus to efficiency and mass privatisation, the nature of the state changed to a mainly regulatory role. But, argues Helm:

“In the second decade of the twenty-first century…the key challenge is not only to deal with the immediate issues of debt and the deficits, but also the wider issues, from pensions and care for ageing populations, through to the environment. Not only is it widely agreed (at least politically) that current debt levels and deficits are unsustainable, but the provisions for future pensions and health, and the protection of the atmosphere and biodiversity have moved from being specialist interests into the mainstream… They share one key feature: they are all long term and intergenerational in character. The economic borders of the state….are currently not designed with this intergenerational perspective to the fore.”

Helm goes on to argue that the main aim of the 21st century state should be to maintain a range of assets that we are currently running down.  These include conventional assets such as infrastructure (one of his favourite hobbyhorses) but also environmental, financial and even social assets. Where we do run down a natural asset, we should offset it by new investment, not consumption – Norway has done this with its sovereign wealth fund based on oil extraction; the UK spent its oil and gas money on a 25 year consumption splurge. What is needed to make this new 21st century state operational, is a public balance sheet – an account of all the public (i.e. social) assets (including environmental ones) and liabilities. This in turn would require us to develop better measures of them. Our current measure of progress, GDP, is a flow measure, not a stock measure, and also a gross measure, not taking into account depreciation of capital.

Helm’s argument is interesting, partly because it contextualises climate change as one of several long term intergenerational problems that the UK and the wider world is going to have to solve, and partly because it is an argument for fundamental institutional change of a concrete type that is not often heard in the climate change echo-chamber.

However, for me, the analysis immediately raises a question, but also a potential answer to that question. The question is how the 21st century state is supposed to emerge politically. As I’ve argued elsewhere, for this kind of major institutional change, you need an organised political constituency that will press for change, and by definition, future generations can’t do that.

It might just be possible for an enlightened political elite to create such a shift of focus for the state, but I would also argue for that to happen, we will have to first live in a more equal society. Helm’s asset based society is one in which there has to be (at least for the forseeable future), lower consumption and higher savings, to fund the necessary investment. This may be fine for well-off university professors, but as has been well documented, income inequality in countries like the UK has increased sharply, and even in the booming 2000s, real incomes in the lower-middle part of the income distribution were stagnating. Putting oil money aside for investment in the future, Norwegian style, imposing regressive carbon taxes or requiring higher pension contributions are all politically easier if everyone really is comfortable and doesn’t feel left behind, but it will be a lot harder in highly unequal Britain, where large parts of the population already feel financially squeezed.

Helm largely ignores distributional issues, and he doesn’t broach the politics of the 21st century state, but I suspect that they will be central to its construction.

1. As new boy in DECC, Ed Davey seems to have been ambushed by the gas industry, with a ruling allowing new gas power plants to emit up to 450 gCO2/kWh out to 2045. This move will mean that there will be no requirement to fit carbon capture and storage. Someone should tell the Climate Change Committee, who say that average emissions from electricity generation need to be 50 gCO2/kWh by 2030 to meet the 4th carbon budget. The DECC press release unusually quotes George Osborne, so either Davey has already given in to the Treasury within a few weeks, in a way that Chris Huhne managed to avoid for almost 2 years, or else he has done some clever deal in the budget.

2. The strength of public sentiment on fuel tax remains very, very strong. Anthony Wells over at ukpollingreport reports on a YouGov Sunday Times poll:

Unsurprisingly the overwhelming majority of people (77%) would support a decrease in the level of fuel duty. There is still a substantial majority in favour when YouGov asked people to balance the competing priorities of cutting the deficit or cutting fuel duty – 59% think it is more important to cut fuel duty compared to 20% who think it is more important to cut the deficit.

“If the deficit has little to with the wellbeing of our children and grandchildren, global warming has everything to do with it. We run the risk of handing them a planet without many of the fascinating features that we had the opportunity to enjoy (for example, coral reefs that are dying, plant and animal species that are becoming extinct, landscapes that are being transformed). Far more seriously, we face the likelihood of handing them a planet in which hundreds of millions of people risk death by starvation due to drought in central Africa, or through flooding in Bangladesh and other densely populated low-lying areas in Asia, as a result of human caused global warming.”

The point is that, in Baker’s words, “the main factor that will determine the economic wellbeing of our children and grandchildren will be the strength of the economy that we pass down to them”. A crucial part of this strength will be the state of the natural environment, which will in turn depend on the kinds of investments we make now.

Put these arguments together – (i) borrowing does not create a net burden, (ii) future welfare depends on the state of the economy, which is strongly influenced by investments today and (iii) the need to make investments that do not erode natural resources (what Partha Dasgupta calls genuine investment) – and you have the idea that Duncan Foley has put forward, that we can borrow now to cover the additional costs of low carbon investments. Future generations will be better off, even with the higher levels of debt, and we will not have to reduce consumption today. Overall, Foley’s position is that ”global warming presents no novel issues of the distribution of economic welfare between generations that are not already inherent in other investment choices”. The key issue in how far to pursue this approach is the value future generations place on a lower stock of GHGs in the atmosphere relative to conventional (high carbon) capital stock.

Foley’s approach may offend the moral principles of some – isn’t it wrong that future generations should have to pay for cleaning up the mess that we have made? However, the point is that future generations would still be better off than if we did nothing, and if borrowing makes it politically possible to act, then that has to be better than expecting additional costs to come out of the pockets of today’s consumers and hitting a political brick wall.

The new research cited by Harvey turns out to be a document called The Carbon Plan, basically yet another strategy document looking ahead to 2020, 2030 and 2050. Chris Huhne’s foreword does seem to put a similar gloss on the numbers: “By 2020 we will complete the ‘easy wins’ that have helped emissions to fall by a quarter since 1990.”

But this is really a piece of spin. Drilling down into the underlying figures (also available from the UK government), we find a slightly different story.

First, while greenhouse gas emissions emitted from within the UK are down by over 25% since 1990, carbon dioxide emissions are down by less than 17%, on the provisional 2010 data.  It is widely known that overall greenhouse gas emissions in the UK are down substantially since 1990, and it has been apparent that we would exceed our Kyoto target easily, but it has also long been thought that we would miss our own domestic target of 20% reduction in CO2 by 2010, and so it has proved (would have been worse without the recession). There is clearly some sleight of hand here, picked up by the Guardian and reproduced as “emissions fell by 25.2%”. This might sound like pedantry – surely its GHG emissions that count, so who cares? But the difference matters because it has proven much easier to cut other GHG (mostly methane) emissions in the past (down 54% 1990 to 2010), whereas it is carbon dioxide emissions that we really have to cut in the future. It is the latter that have to be cut if we want to show leadership. And of course the figures reported in the plan don’t include shipping and aviation. The other point on targets, as we have mentioned before, is that UK CO2 emissions on the more appropriate consumption basis (as opposed to the official production figures) are well  up since 1990, of the order to 20-30%.

A second issue is that, while there has indeed been some decarbonisation in the power sector, this all happened in the 1990s, the dash for gas period. Greenhouse gas emissions (almost all CO2) from power stations fell by almost 28% between 1990 and 1999. This was pre-emissions trading, and largely the result of privatisation and changes in the relative price of coal and gas. Since 1999, and over the period when climate policy started to come in more seriously, emissions from the power sector rose again by around 20% to the pre-recession height in 2007. Sure, we have built more renewables, but it hasn’t been enough to offset the resurgence in coal use.

Another odd thing is about the residential sector. Despite all the action on insulation and boilers, emissions from the residential sector are higher in 2010 than they were in 1990. This may have been due to the cold winter in the latter year, but pre-crash emissions were still about the same level as they were in the early 1990s. There has been some decline since the early 2000s, but it’s not earth-shattering.

The one sector that really has seen big declines in CO2 emissions (20% between 1990 and 2007) is the business sector.  According to a recent UK Energy Research Council study, this fall has been due to improvements in efficiency rather declining output or the loss of heavy industry (which had mostly happened by 1990). Unlike the power sector, most of the fall has been in the 2000s, not the 1990s. This is in fact the only part of the economy where the UK may have a claim to be walking the walk (transport emissions flatlined).

This is not a bad achievement in itself, but it gets lost in the noise. Government will spin the figures to exaggerate policy impact and protect its reputation. Environmentalists and various industry lobbies will also be selective and look for stats that make performance look bad. The recent exchange on the costs of offshore wind as a proportion of household energy bills is a good example. What we need is good reporting that can cut through both sets of bias and tell it like it is.

So far, so familiar. Indeed, the dramas of individual COPs have now become so repetitive, that it is surely worth standing back and reminding ourselves of why we already know, really deep down, before the event what will happen at Durban. It is also worth reflecting on the fundamental dynamics of the climate change  negotiations. For me, the best way of doing this is to turn to Scott Barrett’s essential analysis.

His account is pretty simple. To work, binding environmental agreements have to involve an incentive to participate. In the case of the Montreal Protocol, addressed at stopping the growth of the hole in the ozone layer and on which the Kyoto protocl was modelled, the incentive for North American and European leaders was political pressure from publics worried about skin cancer. For the developing world, it was the (relatively small) side-payment they got for phasing out CFCs and HFCs over time. In the case of climate change, it’s not at all so clear what the incentives are. As we have frequently said in the past, concern about climate change is widepread, but not a priority (outside of the climate community). Future generations will be the worst affected, and they don’t have a vote. Latterly, countries like China and maybe India have started to see some benefit to exporting clean energy technologies to a global market driven by an agreement, but they are not quite ready to sign up, and obviously the US is worried about ending up importing all that kit (looks like a two-way action in the WTO is looming).

A second issue is enforcement, which for Barrett is the most important factor. He noted that “the focus of the Kyoto negotiations was on the setting of targets and timetables. When the treaty was first negotiated, little attention was given either to compliance or participation”, and the same looks like it will be true of any successor. Again, the Montreal Protocol tied compliance to trade sanctions. Barrett argues that this same approach would not work for a climate agreement. the main contender for a mechanism, border trade (or carbon) adjustments are too open to political manipulation, accusations of protectionism in disguise and would rub up against the WTO.

Where does that leave the prospects for an agreement, now and in the future? As for the now, we seem to have lapsed into a dynamic that the eminence grise of game theory, Thomas Schelling, actually recommended as long ago as 1998:

Thomas Schelling’s proposal is characteristically singular in its approach. It explicitly eschews international enforcement. It would also abandon the targets and timetables approach, relying instead on the implementation of policies and measures—that is, on actions rather than outcomes. Schelling would invite countries to pledge to adopt policies and measures, and open these to international review. The policies and measures proposed might create a kind of yardstick by which countries would be judged—providing a small incentive, perhaps, for mitigation beyond the non-cooperative level. Without international enforcement, however, his proposal cannot effect substantial mitigation.

Barrett’s answer is different. With very weak incentives, he argues, the only solution is to reduce costs, and the way to do this is through technological development. As he argues, an agreement dominated by targets, like Kyoto, cannot do this on its own:

Like Montreal, Kyoto is meant to provide a “pull” incentive for R&D. In capping emissions, Kyoto raises the cost of polluting, and so creates a demand for carbon-saving technologies, just as Montreal created a demand for CFC substitutes. The difference between the two situations, as already shown, is that the cost of substituting for CFCs was low. The cost of climate change mitigation will be much higher, and this matters. When the costs of supplying a global public good are high, the incentive not to participate is high, and the burden on enforcement very great. If the treaty cannot support that burden, the result will be very weak incentives for innovation and diffusion of new technologies.

Instead, argues Barrett, we should be aiming for an agreement that commits countries to serious support to R&D for low carbon technoloogies and action in areas such as technological standards, making an agreement look less like the Montreal protocol and more like the MARPOL agreement on shipping pollution.

Many people in the climate world will have read Barrett’s book, so why are they at Durban? Maybe it is just the buzz, getting to watch Bono and Angelina doing their thing, and hitting the surf afterwards. Precisely because they are so stark and simple, the underlying dynamics of the UNFCCC aren’t nearly so sexy, but we forget them at our peril.

Nice bit of satire from the delightfully named Men With Day Jobs – thanks to John Macgrath via Duncan Green.