Big business is right to be concerned about the chancellor’s equivocal strategy
Walney offshore windfarm, 10 miles west of Cumbria in the Irish Sea . Photograph: Jeff J Mitchell/Getty Images
As the coalition prepares to introduce its energy bill into Parliament in the next few weeks, it must demonstrate political leadership and ensure that its policy is based on robust economic analysis, recognising and addressing failures of the market.
The most obvious market failure is created by the fact that, without policy, the price of products and services that involve emissions of greenhouse gases does not reflect the costs of damage caused by climate change.
A strong and stable carbon price corrects this market failure and helps to produce a level playing field on which new low-carbon technologies, such as wind, solar and carbon capture and storage, can compete against fossil fuels. However, it is not the only market failure that holds back these new technologies.
A failure arises as well from the inability of capital markets to manage the risks associated with investments in new technologies properly.
And other failures are associated with the limitations of networks, particularly concerning public transport and grids. Most consumers and many firms do not yet fully understand the technological opportunities that are available.
At a time when the public finances are under strain, it would be better to deal with these market failures through the tax system to disincentivise high-carbon activities or even regulate against them.
But it takes time to design and implement such policies and delaying action is dangerous because it can lock in high-carbon infrastructure, such as fossil fuel power stations with unabated greenhouse gas emissions.
So, in the meantime, while these market failures are inadequately tackled and there is not yet a strong and stable carbon price, low-carbon technologies need government assistance through direct subsidies.
These subsidies should be reduced and eliminated as the costs of development and deployment fall over time, as carbon markets become stronger and as other market failures are tackled.
But it is crucial that the reductions in subsidies for low-carbon energy are carried out according to a predictable rule-based system. Sudden and unexpected cuts undermine the confidence of the private sector and hold back badly needed investment in the UK power sector.
Those who argue against subsidies for low-carbon technologies are implicitly adopting an anti-market approach. Those who want markets to be harnessed to deliver greater prosperity and wellbeing, on the other hand, recognise a role for public policy in ensuring that markets can do their job in providing incentives and promoting entrepreneurship.
Removing subsidies for low-carbon technologies too quickly and erratically would undermine efforts to reduce the UK’s emissions of greenhouse gases in an efficient and effective way and delay progress towards our ultimate target of a cut of at least 80% by 2050 compared with 1990.
Such delay would risk relegating the UK to also-rans in the global low-carbon race and could mean that we are shut out of the developing markets for cleaner goods and services.
But most dangerous of all, delay would mean higher concentrations of greenhouse gases in the atmosphere and huge risks across the world from climate change.
The coalition must demonstrate leadership through its energy and climate policies, supporting creativity and innovation in the power sector, and boosting the UK’s prospects for sustainable economic growth.
Anything less would damage the prospects of future prosperity and wellbeing, for us, our children and future generations.
Author: Nicholas Stern – The Observer
Source: The Guardian