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: kate@old.adamsmith.org | 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.

Why the answer is a carbon tax and not carbon credits

Back a decade we here at the ASI were mulling through the implications of the Stern Review and associated work. We still differ over the strength of the evidence stating that disaster is imminent. But our views on how to deal with it all assuming the evidence is true have converged. Some of us were in favour of carbon permits, trade in them across countries and industries, for such markets would be a most efficient manner of gaining the cheapest reductions in emissions quickly. Others of us preferred a carbon tax. Essentially on the grounds that while in theory less efficient the intervention of the necessary bureaucracy would make the cap and trade systems less efficient after all.

Here we show that all projects abating HFC-23 and SF6 under the Kyoto Protocol’s Joint Implementation mechanism in Russia increased waste gas generation to unprecedented levels once they could generate credits from producing more waste gas. Our results suggest that perverse incentives can substantially undermine the environmental integrity of project-based mechanisms and that adequate regulatory oversight is crucial. Our findings are critical for mechanisms in both national jurisdictions and under international agreements.

So we are, assuming the evidence insisting upon action is robust, rather of the view that the tax route is better.

The death of the solar subsidy

This looks like a good idea:

Britain's solar boom is over after ministers announced they would offer virtually no subsidies for people to install panels on their homes.

For there's no actual reason for the UK to offer such subsidies. Despite these claims:

Alasdair Cameron, from Friends of the Earth, said: “From California to China, the world is reaping the benefits of a solar revolution, yet incredibly in the UK David Cameron is actually trying to shut rooftop solar down. “These absurd solar cuts will send UK energy policy massively in the wrong direction and prevent almost a million homes, schools and hospitals from plugging in to clean, renewable energy.” Dr Doug Parr, from Greenpeace, said: "The timing couldn't be worse as the young and potentially booming solar industry is on track to go subsidy free but if these cuts happen, it will be too sudden, too soon and too dramatic. It is highly likely to irrevocably damage the domestic solar industry.”

Solar power has indeed been getting cheaper at a remarkable rate. But it's been absolutely nothing at all to do with any subsidies being offered by the UK government nor any feed in tariffs gouged out of the energy consumers of Britain.

This is not, by the way, anything at all to do with the arguments over global warming exists, whether we need to do something about it nor anything else like that. It's a simple public goods argument. Let us assume that the problem is real and we do want to do something about it. That something being, well, we'd like solar power to become cheap enough to use effectively.

So, should British people have to pay more for their electricity to make this happen?

Nope, they most certainly don't need to at least. How cheap solar becomes will be driven by technological breakthrough. And that will be driven by the wall of money that countries like China, Germany and the US are throwing at it. The technology, when it arrives, will be a public good: we Brits will be able to use it when it arrives just like everyone else will.

So, the correct thing to do is let everyone else spend their money on such subsidies and we install it when it actually works. The removal of the British subsidies makes no difference at all to the date at which this wonder-technology will arrive but it makes us all better off while we wait for it. Thus a good decision.

Isn't Corbyn offering us all such lovely sweeties?

As the cynics realists among us know, the art of electoral politics is to bribe enough people with other peoples' money that you've managed to buy enough votes. Which is what Jeremy Corbyn is doing here:

Corbynmania went into orbit when the Labour leadership frontrunner revealed he would reopen coal mines if he becomes Prime Minister.

Bookies favourite Jeremy Corbyn has unveiled his vision for the country, which includes nationalising parts of the gas and electricity sector and “where you can” reopening pits.

That's all three of the remaining members of the NUM onside, plus any number of Labour Party romantics who get all hot and sweaty at the thought of manly men doing manly things like dying of black lung and being crushed by cave ins.

“I think we can develop coal technology. Let's do so because energy prices around the world are going up. Open cast mining is not acceptable, deep mined coal is possible and is an alternative.

Open cast mining: it's not that it creates a hole in the ground that is the problem (and the spoil piles of deep mining are just as much of an eyesore) it's that it can be done with two men and a dog which isn't going to revive that industrial proletariat that all too many still swoon over.

And clean coal, carbon capture, simply isn't going to happen in anything approaching a reality that we would want to live in. Quite apart from anything else, any technology that actually works (not something we're sure can be achieved) would turn out to be vastly cheaper if applied to natural gas rather than coal. So the very idea of clean coal is pretty much a non-starter.

But then this is an election campaign, isn't it? Nothing anyone says has to make any sense, it just has to buy those votes....

To disagree a little with Allister Heath here

We like Allister around here, really we do, but we fear that he's fallen into a slight error here in his list of taxes that should be abolished:

Third and fourth, the supplementary charge on the profits of oil and gas firms working in the North Sea, and the petroleum revenue tax, which hits older fields. Adam Memon of the Centre for Policy Studies is right to be calling for the immediate abolition of both taxes. The official statistics are grim: in 1998, Britain’s oil and gas output reached 230m tonnes of oil equivalent; in 2014, this was just 76m. One consequence of this catastrophic shrinkage is that the Scottish National party’s stated plan to rely on North Sea revenues to keep the welfare state going in an independent Scotland are deluded – but it also means that the Government must stop using the tax system to discourage what is left of this industry. Offshore corporation tax receipts have collapsed from £9.8bn in 2008/09 to £2.1bn in 2014/15, the Centre for Policy Studies reminds us, and is set to fall further to £600m and below shortly. Many fields still face horrendously high marginal tax rates, yet yield less and less for the Treasury. The supplementary charge and the petroleum revenue tax should both be axed. This wouldn’t be enough to turn back the clock but it would help engineer at least a minor renaissance for the sector. As a result, it is possible that the industry would, on balance, yield more cash for George Osborne.

Even The Guardian once managed to note that there really is a Laffer Effect on oil taxation. Noting that Gordon Brown has managed to raise tax levels so high that production, and thus revenues, declined. But that's an issue about tax rates, not about the existence of a tax. And the truth is that these are resource rents and those really should be taxed until the pips squeak.

The point being that such natural resources simply exist. No one created them and thus there's not really any reason why anyone in particular should profit from their existence. And we do need some tax revenue because we do need to have some government (no, we are not anarcho-capitalists). That people should profit from their capital, ingenuity and work in extracting and refining is just fine: but not that a private company should profit simply from the existence of such natural resources. That value, that resource rent, should be taxed away.

That is, we can have productive arguments about whether the tax rates are currently too high, but we shouldn't then fall into the error of arguing that such taxes should be done away with. The price of oil is set by the market in general: thus all such resource rent taxation does is change who profits from that happenstance of the creation of a natural resource, private company shareholders or all of us from lower taxation upon our incomes or consumption.

Change the oil taxation system by all means but don't end up not taxing resource rents.

Old myths die hard, don't they?

Well, no, not really Geoffrey, not really:

Poor harvests, far away, were famously one of the causes of the Arab spring. In 2007-8 grain prices spiked after poor weather cut worldwide production, at a time when food stocks had been run down – and export restrictions, by countries wishing to secure their own supplies, made things even worse.

This is to introduce the idea that climate change is going to lead to extreme weather and.....yes, you guessed it....Aieee! We All Die!

Except of course it wasn't bad harvests that caused the problems. It was the idiot idea of feeding corn (and, to a lesser extent, wheat) into car fuel tanks rather than people. As much as 5% of the crop was diverted to this process leading the World Bank to tell us that "large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices".

That is, the problem was caused by one of the sillier attempts to deal with climate change. And as ever, if you misdiagnose the cause of a problem you're never going to be able to solve it.