Response to Guy Newey on carbon pricing

Policy ExchangeGuy Newey, head of environment and energy at the centre-right think-tank Policy Exchange has written a critique of my post on the politics of carbon pricing. Just a few further thoughts in response:

1. I should just make it clear (and maybe should have done in the original post) that I’m not against carbon pricing; I’m very much for it. We will clearly need some form of carbon pricing effective across major economies if we are to keep the vast majority of fossil fuels in the ground. which is what we need to do to avoid (really) dangerous climate change. My issue is how we get there.

2.  Guy thinks that the technical fixes that the EU ETS needs are on their way, and that the scheme is moving in the right direction:

“Implementation is not easy, but the third phase of the ETS is better than the second, which was better than the first. All have delivered the environmental outcome for which they were designed.”

He may be right about the fixes, but I’m less impressed by he is by the ETS to date. The price of carbon collapsed when the financial crisis hit, and is still under €6/tCO2 when I looked at PointCarbon this morning. If this is better, then we still have a long way to go. Equally, the environmental outcome (i.e. keeping under the ETS bubble) in phase 3 has so far been delivered by the recession, not the policy. We do not know what would have happened had the economic growth of the 2000s had continued. The carbon price could have risen sharply, and it is not clear what the political consequences would have been. There is no reason to believe that the ETS carbon bubble is any more immune to political pressure than renewables targets (or indeed the UK’s fourth carbon budget…).

3. Guy thinks I am wrong on carbon price volatility, i.e. he thinks it doesn’t matter. My main reason for thinking it does is that it weakens the influence of carbon pricing on electricity generation investment decisions, which are inevitably long-term and sensitive to risk. The most important thing that the carbon price should be doing is preventing any new coal-fired power stations being built in Europe. A predictable, credible carbon tax would do that more effectively than a volatile carbon price. But to be honest, either would be better than nothing at all, which is what we have close to at the moment…

4. Marginal pricing – Guy makes the argument that giving extra rent to low-carbon generators is a good thing because it will lead them to build more low-carbon capacity. Well maybe, but my main point here was that the effective carbon price paid by consumers of electricity is very high, so the argument that carbon pricing is much lower cost than expensive renewable subsidy is not so simple.

5. Guy also argues that carbon pricing or taxes are not “too difficult” politically. Actually I didn’t say they were too difficult, just difficult, and certainly more difficult than, say, The Economist, recognises. He cites the case of the Carbon Floor Price, which is supposed to rise each year up to 2020. However, the CFP (much like the Fuel Duty Escalator in recent years), looks like it will be frozen from 2016 by our politically astute Chancellor, which kind of supports my case…

Do the public like what Guy calls a “bucket-load of technology specific subsidies” any better? Well, as I argue in my original piece, I think that depends in part on who gets those subsidies. But actually, most people probably do prefer technology-specific technologies. A few years ago at IPPR I did some focus group work on carbon taxes and subsidies, and was struck by how people really don’t like carbon pricing, because they don’t fully understand how it works and can’t actually connect it to something concrete, that they can see. With subsidies for wind, solar and marine, you can see exactly what they lead to. And in fact, most people in the UK still like renewables. They are just increasingly less keen on the costs.

6. While Guy does accept that who gets the rents matters, I don’t know if he’s fully on board with my argument. He says that “how important community energy can be in the transformation of our electricity system is unclear.” But this is to miss the point. Solar PV makes a very minor contribution to actual electricity generation in Germany, but it makes a huge symbolic contribution to the politics of renewable electricity. We don’t have to do it all through cooperatives, municipalities, farmers and middle-class home owners, but my view is that it would sure help a lot if we did more than we do at present.

7. Guy finishes with what is a familiar cri de ceour in the green movement, i.e. the need for political will:

“Many of these points boil down to the need for more political will. The only way you overcome the political problems of a carbon tax or cap and trade, or indeed renewable energy support system, is by being better at the politics. You need to convince people that what you are doing is important and that the way you are doing it is fair. No clever technical fixes or community stakeholdings can conceal that overwhelming political challenge.”

I am sure he is right about the need for political will (I’ll resist from any cheap party political shots here), but it remains the case that politics is more than just about ideas; it is also about interests and institutions. Unless these are engaged with, and transformed in ways that support those ideas, then I fear that we will not get very far.

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