Chris Huhne writes… The economics of low-carbon

We Liberal Democrats need no convincing of the urgent need to tackle climate change. Indeed, that’s why there’s a Liberal Democrat minister heading the Department of Energy and Climate Change – one of the most important contributions we bring to the coalition government.

Not everyone in the UK, however, is yet so persuaded, and we also face problems in pressing the case abroad. Last summer, together with my French and German counterparts, I opened a debate in the EU over adopting a more ambitious emissions reduction target for 2020 (of 30 per cent, instead of the current 20 per cent), but we haven’t yet managed to convince the majority of member states. It’s all too easy for governments, struggling with recession and the need to reduce public deficits, to postpone action on climate change to easier economic times.

You and I know that’s a profound mistake; but we need to find new arguments to persuade those yet unconvinced. So I’ve been concentrating recently on the economic, rather than the environmental, case for the transformation to a low-carbon economy. And it’s a compelling one, in three respects.

First, because under certain circumstances, the cost of going low-carbon is less than the cost of not going there. The Stern Report of 2006 estimated the costs of avoiding dangerous climate change at about 2 per cent of global GDP by 2050. But even that modest estimate depends on assumptions about the price of the fossil fuels our economy currently depends on – oil and gas (in most countries, their prices are linked). If the oil price is around $80 a barrel, then UK consumers would pay slightly more under our policies for promoting energy efficiency and renewable energy – about an extra 1 per cent on their electricity bills by 2020. But if the oil price reaches $100 a barrel, the British consumer breaks even. And above that level, low-carbon policies are cheaper than fossil fuel policies. On the day I’m writing this, 8 March, the oil price reached $115 a barrel. Even before the current unrest in the Middle East, the US Department of Energy forecast $108 a barrel by 2020.

There’s another reason to worry about fossil fuel prices; as we know from the last four decades, oil prices can not only be high, but volatile, increasing (or falling) very suddenly. Such rapid price fluctuations can cause serious damage to an economy; it takes time for companies and households to adjust without pain. So that’s my second economic argument for supporting a low-carbon future: insulation from oil and gas price shocks. I asked economists at DECC to look at how a 1970s-style oil price shock would play out today. They found that if the oil price doubled, say from $80 last year to $160 this year, it could lead to a cumulative loss of GDP of around £45 billion over two years. This is not just far-off speculation: it is a threat here and now. In 1973, the oil price didn’t just double; it quadrupled in three months. The quicker we move to a low-carbon economy, the more secure and stable our economy will be.

My first two arguments are defensive; the third is positive. This transition to the low-carbon economy does not just protect against threats; it opens up a world of opportunity. The global low-carbon market is worth more than £3 trillion, and is projected to reach £4 trillion by 2015, as economies around the world (led at the moment by China and Korea) invest in new energy and transport technologies. The UK share of that market is currently worth more than £112 billion, but it could be much larger. At home and abroad, the opportunities are huge. Our key policies – the Green Deal to stimulate energy efficiency, reform of the electricity market to create clear incentives for low-carbon power generation, the Green Investment Bank to steer investment capital in the right direction, subsidies for electric cars, and more – will all help the UK generate employment and export opportunities.

Recovery from a deep recession is not a respooling of the same old movie. The old industries do not just bounce back. It’s about new industries leading the way – just as it was in the 1930s, when manufacturing of cars and electrical goods helped the UK fight its way out of recession. Britain can lead the way, in carbon capture and storage, for example, or in marine renewables, or in offshore wind, where our scientific, research and engineering strengths will stand us in good stead. The faster we move, the bigger and better our low-carbon industries will be, and the greater the share of that expanding world market will be ours. Clear green signals will spark more green investment.

So that’s the economic case for the low-carbon transition. It’s up to us, as Liberal Democrats, to argue for it just as strongly as we argue for the environmental case.

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5 Comments

  • toryboysnevergrowup 11th Mar '11 - 12:24pm

    Perhaps one of the things that could be done to help with future energy planning would be if we were to have efficient energy markets which gave out reliable and consistent signals based upon supply and demand, on which rationale people could then make rationale investment decisions and also spare a good deal of misery to Joe Public in the process.

    Instead we have extremely volatile markets which are driven by hedge funds and other speculators whose motivations are usually a million miles away from ensuring energy and enviromental security. Obviously international action would be required to restore some sanity to energy markets – but I see little from the UK government in this regard and given the closeness of Osborne and Cameron to the hedge funds I very much doubt there will be any change.

  • I agree with the two above – stability would be very helpful. Fair enough, it is not easy for Chris Huhne to deliver internationally stable energy markets, but delivering stable national policies should be in his power. So what the hell is he doing?

    Chris Huhne has now presided over the tearing up of the one green policy the Government had that was performing well – the Feed in Tariff – leaving massive uncertainty among investors and the industry as to what will happen next. It was inherited from Labour – but only because a succesful campaign by the LibDems and others persuaded Labour to do it – and our policy before the election was to expand the scheme.

    Not only that, but Huhne has deplyed a pack of disingenuous nonsense to wreck the scheme, including claiming on C4News that a school installation would displace 1500 household measures (actually it was 15 – and the two things only ever came into competition at all because Chris Huhne had already decided to limit the scheme with a financial cap on it).

    And how about stability in the flagship Green Deal? If you were an investor at the time of the last conference, you;d have been pleased to see him welcoming a “revolution”, offering up to 250,000 jobs providing a one-off upgrade to make homes fit for 2050. By November it had fallen to 100,000 jobs. Now the ambition has slumped too – when did Chris last talk of a one of refit – now he goes no further than promising a step to improving homes (i.e. loft insulation).

    Huhne needs to up his game – if he can’t deliver a decent green policy in a coalition of a party headed by a man who has a lot to lose if his hug-a-husky image is dented, and a party that claimed to be the greenest ever then how he can have leadership pretentions beats me. Perhaps it is because he is concentrating a bit too hard on positioning himself ready for the moment Clegg crashes, and not enough doing his day job.

    Which has echoes of a Gordon Brown to be honest…and look what a success he was.

  • @toryboysnevergrowup
    @Liberal Eye

    The difficulty is that strong signals about supply are never demonstrated in a market, it’s against the suppliers interest. As such the role of speculators is to estimate the balance between supply and demand and facilitate the accurate pricing of a comodity. A market only fails to function properly if there’s a dominant position that’s exploited on either side or regulated badly.

    Having said that, onto what I wanted to say…

    Mr Huhne makes good points about the need to decarbonise from the economic perspective, though it’s tricky ground to tread. As soon as you step onto the ‘we need to do this from an economic perspective’ so many variables enter the argument that maintaining control over a cohesive and coherent dialogue is nigh on impossible. For example:
    The (perceived with some significant players stating that perception) economic efficiency of alternative low carbon generation (i.e. nuclear)
    The supposedely impending reduction in gas prices due to unconventional reserves (as proposed by Dieter Helm, I personally don’t buy his arguments either about unconventional gas or Eliectricity Market Reforms. He was spouting nonsense about peak oil not being a realistic prospect over a year ago and failed to publish the paper he was working on, so far it’s 9 months late)
    The ability for the government to mitigate rapid price fluctuations through tax policies

    And I’m sure there are plenty more arguments waiting in the wings to rear their ugly heads.

    If you ask me it’s best to drop the first two points and stick with the ‘we can rebuild our economy with this’ though in saying that there’ll be a need to scrap EMR if you’re not going to scare the money markets out of investing in UK projects. Alternatively, if there really is something about EMR that grips you for some reason, it will jack up the price of financing to make the wind farms economically inviable/put up the level of support needed (that’ll be great more money going to the banks!)

    If the plan is to make renewables a mainstay of an economic recovery it’s important to understand the areas in which we add more value than our competitors and as stated that’s in our expertise however expertise is only capable of being demonstrated if it has the right organisational framework. Ensuring that efficient organisations are enabling the growth is a key concern and at the moment the interest and structure of the untility companies prevent them providing sound basis for confidence. Their working practices keep them from hiring the right people to run their new business areas, they’re dominated by unions and can’t pay Offshore O&G wages to people on the same level as a power station engineer so they end up with people with no expereince trying to build in one of teh harshest environments possible and costing everyone large amounts of money in the process. Large businesses aren’t (normally) capable of efficiently dealing with innovation and new business sectors, however the need for vast captial reserves prohibits samll organisations from being effective in the market.

    So what’s the solution? Well, there’s a range of potions from the radical to the light touch. Light touch is the favourite of governement because if it aint broken don’t fix it. The difficulty is if you don’t take your car in for a service it doesn’t last as long as if you do…

    My solution? Enable greater competition in the development market, realise that developed wind farms are an asset to be sold on to capital investors (Utilities) and ensure that volume enables the market to be efficient. that voume needs to come from increased electricity demand, hence electrification of transport (domestic cars) and smart grids (with vehicle to grid technology providing storage). Finally, if you’re reaally feeling like making a name for yourself in history, working with Mr Cable on the rights of employees to 50% of the vote in shareholders meetings, that way you get efficient business that are capable of pricing risk and renumerating the whole of their workforce (by that read not overpaying the top few percent) properly.

    Sorry about how long that was.

  • toryboysnevergrowup 12th Mar '11 - 10:02am

    @matt “As such the role of speculators is to estimate the balance between supply and demand and facilitate the accurate pricing of a comodity. A market only fails to function properly if there’s a dominant position that’s exploited on either side or regulated badly.”

    Unfortunately the speculators in energy markets more see their role as making profits from price volatility. Ask any dealer what they like – and price volatility will be pretty high on their list and strangely enough balancing supply and demand and accurate pricing will not be mentioned (except by a few dishonest but political ones). But you are right about them being in a dominant position – I would be surprised if 10% of transactions in most energy markets relate to actual physical requirements.

    The basic point is that it becomes extremely difficult to make any investment decisions if you have no idea about the level of future energy prices – and most markets at present provide no such signals. It is perhpas worth noting that on the continent where there is more regulation and direction of price of energy supplied top their grids that investment in renewables seems to be gong ahead at a much higher rate than in the UK.

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