Climate crisis or energy crisis?

A Common Energy Policy for Europe?

With the rising temperature of the climate debate in recent years, many have remarked upon the apparent inability of Treasury officials to nail the endless inconsistencies, uncertainties and hyperbole which seem to inform the climate policies of developed countries. 

Why does nobody know the net present value of the national economic benefit created by the European ETS – assessed with that hard-nosed rigour for which the UK Treasury is renowned? Clearly, because their political masters have decided otherwise. Climate-related decisions are based on economic forecasts from the Inter-Governmental Panel on Climate Change (advised in turn by Hadley-CRU) or an absurd Nicholas Stern, rather than through normal Whitehall channels. 

Europe, and Britain in particular, has been the driving force of climate-related political rhetoric and policy for over 2 decades. Of the 38 Annex 1 countries which accepted obligations under the Kyoto Protocol, no fewer than 34 were European (the others were Japan, Russia, Canada and New Zealand – recently joined by Australia). One undeniable catalyst was the rise of the European Green parties – now the fourth largest coalition in the European Parliament – but they obviously needed allies. 

An illuminating insight into the mindsets of leading UK political figures is provided by the transcript of a 2008 debate entitled “The Politics of Climate Change” between Oliver Letwin and Nigel Lawson. 

Both of these men have Oxbridge firsts in economics, and are acknowledged experts in energy policy. One was a long-serving Chancellor and the other Shadow Chancellor, and both were one-time Thatcher protégés. Lord Lawson is founder of the Global Warming Policy Foundation, and Dr Letwin is Head of Policy for the British conservative party and is expected to be Environment Secretary in the new Government elected in May 2010. 

Letwin intends to continue Blair/Brown’s alarmist policies (broadly) aimed at changing forecast temperatures, while Lawson is a sceptic, who prefers adaptation to any warming effects that are actually experienced. 

Notable in this debate between insiders is the absence of any reference to temperatures, rising sea levels or weather extremes. Instead, the exchange focuses closely on energy security, future energy prices, indirect taxation and industry protection. 

Energy Security

North Sea oil and gas are running out, and Britain will soon become heavily dependent upon imports from Russia, Libya and the Middle East. Letwin, wanting to be “liberated” from what he regards as the three worst possible sources, sees the solution in nuclear plants and CCS coal. He will also provide financial incentives for more energy-efficient cars and homes. 

Lawson agrees that all EU countries face a “real crisis”, but advocates coal, nuclear, and gas storage. He decries de-carbonisation of the economy as imposing massive costs, doubts the CCS technology, and sees wind and efficiency as trivial contributors. 

Energy Prices

Letwin believes the trend to much higher oil and gas prices is inevitable, and will bring sharp price volatilities – in a range of up to 250% – which will be built into the effective capital cost of new power plants. He is optimistic that improved technologies by about 2020 might see the price penalties for CCS coal and nuclear held to around 10%, so as to provide an “electricity supply which is dependable, cheap and secure”. Nothing drastic is required and the government should orchestrate gradual change over 40-50 years, mainly by carbon price mechanisms. 

Lawson says ‘peak oil’ is nonsense, and even a small price increase will multiply recoverable reserves. Fossil fuels will remain the cheapest options, and it is notable that sudden 2008 oil price increases of over 100% did not suppress demand. The emphasis on CCS highlights the same point, but a free market will allocate cost-effective options and timing much better than government interventions. 

Indirect Taxation

Unlike the current Labour regime, which favours a stealth tax, the Conservatives aim to “tax environmental bads (carbon) and simultaneously reduce other taxes on families pro rata, pound for pound,” progressively switching from direct taxation to indirect. Labour will find it very difficult to object to carbon taxes, says Letwin. 

Lawson contends that people won’t decarbonise unless the tax significantly exceeds the cost difference between carbon energy and its substitutes – a huge burden on the economy. 

Industry Protection

Both participants see an all-country post-Kyoto agreement as the most effective insulation of their tradeable sectors from carbon-tax-induced loss of competitiveness; but neither favours trade sanctions against untaxed imports. 

Letwin accepted a GBP100 wager that there will be an international agreement by 2012, claiming the EU can gain “moral authority” by being world leaders. Lawson cited the 1980s Kinnock policy of “unilateral disarmament” and took the bet. 

Analysis

It is not my purpose to score the debate, but to highlight the issues which these insiders see as drivers of “The Politics of Climate Change”. 

Oliver Letwin has made a strong strategic case for resource-poor countries, who are at the mercy of a few unreliable and exploitative suppliers for their essential energy supplies – and for their international competitiveness. The text-book solution is a high tariff barrier to encourage the use of domestic substitutes and to fund domestic producer subsidies. A very high tariff can also fund a desirable reduction in direct taxes and new government services. 

Sound familiar? Oh yes – the European CAP (Common Agricultural Policy), which provides expensive food security and is funded by Europe-wide value added taxes. 

But new tariffs are now prohibited by the WTO, and both the CAP and VAT are unpopular with voters. Enter (drum roll) – “Climate Change” – and an indirect tariff via carbon taxes, an Emissions Trading Scheme (ETS). All done to save the planet, stop the seas from rising and save polar bears from dying. Free support from the Green party, other environmental activists, the United Nations bureaucracy, all mainstream news media (besotted with disaster stories), the finance sector, the oil industry, and even Nobel laureates like Al Gore. 

It gets even better if the rest of the world can be persuaded to follow suit. Instead of Europe taking a competitive hit in the process of solving its particular energy problems, every other country could volunteer to take the same hit. In fact, if the retrospective year 1990 can be gerrymandered as the global baseline, all other countries will volunteer to be worse off (because the EU had “hot air” from the collapse of the Soviet East in 1992, and the substitution of North Sea gas for Western coal in 1991). 

The interests of Europe are easy enough to see. But do they coincide with the interests of Australia or New Zealand?