Reinventing the State Chapter 12: The Economy and Climate Change

As expected, Chris Huhne delivers the goods on this. He

advocates a package that can be constructed without hurting the poor or even compromising on redistribution.

Which is overselling a little - there is real competition for spend between social and environmental projects, and even if the green taxes levied are largely progressive or neutral, they will have knock on effects on product prices and the cost of living.

However, I can forgive Chris for getting a little carried away. (Hmm, change of house-style there. First names from now on.)


We start with a nice go at the Green Party's "eco-Marxist" or anti-growth position

Since growth is, in one view, the end result of so many other actions freely undertaken by individuals and companies, albeit within a framework set by government, this implies that we must abandon the principle that we are free to do as we will so long as the activity is not forbidden by law. It implies a process of licensing and permission that is deeply antithetical to liberal values. It would, indeed, be reminiscent of the Soviet Union's economic planning by Gosplan.

this is something I have been trying to say on this blog for some time, but Chris has put it better.


Most of the arguments that follow will be familiar to those who have read the zero carbon paper agreed at Brighton 2007. Carbon trading and green taxes are extolled. More direct measures are advocated in areas like home energy efficiency where many are locked to the assets they have and so pure price signals would generate much pain and little movement. We go on to such things feed-in tariffs, LVT, and leapfrog funds for developing nations.

The overall picture here is that we can decarbonise the economy, with technology that largely exists already, at not to great a cost, and that by doing this we can end any dilemmas about supporting development in the third world. This is a position I wholeheartedly endorse.


However, I do have a few issues with some of the details.


First Chris seems unduly keen on cap and trade and the EU ETS. He even suggests it comes before green taxes in the hierarchy of liberal economic instruments. I find this pretty breathtaking. Trading never beats taxation - sure it sounds better - but the two are equivalent in theory: a price is put on something that must be limited, to allow the market to place those limits in the most efficient places. In practise it is easier to calculate the right level for a pigovian tax and let the market find the level than calculate the right level and let the market find the price. A more stable price, futhermore, is a clear political signal and a better guide to investment that might be scared off by volatility.

The EU ETS goes further wrong in giving permits away, which is effectively giving public money away for nothing. And what does this mean? Windfall profits as the "opportunity costs" of not reselling these free permits is passed on to consumers. And new entrants to the market - just what we need to maximize innovation - are virtually kept out as they don't get these grandfathered freebies.

Finally, I would suggest that international agreements on national carbon limits and carbon trading will be vastly more difficult to reach - because it implies a divvying up of the climate commons - than an agreement that each country will simply tax its own emissions and keep the revenue. A lower rate for developing countries if they want, fine. Political transparency for which countries are pulling their weight, and which are freeloading? Yes, please.


Moving on. Chris advocates a legislative requirement on energy companies to sell less energy from one year to the next, hoping this would incentivise them to provide energy efficiency grants to customers. I find this pretty barmy. As long as the power is connected it is the consumer who chooses how much to use. Rather than legislate a duty on suppliers they don't have the power to meet, why not tax or ration or otherwise seek to influence the person with their finger on the switch. And any scheme like this inverts the normal incentives to sell your product with penalties and incentives will be highly gameable. There'll be more windfall profits here and no gains. A better insulated home is a public good and a good for the occupants. Why should an energy supplier (who we might rotate every 3 months) pay for this at all?


Feed-in tariffs are another measure, widely advocated for domestic microgen, but on which I am fairly cautious. I fully support the idea for big wind and so forth, where a couple of pence per unit will make all the difference. Chris suggests a feed-in tariff of 4 times the feed-out rate for domestic microgen. At that rate I could buy, or build, a flywheel and sell grid electricity back to the grid on a slight delay. We shouldn't feel such a need to pay for something - like tiny amounts of domestic microgen electricity - what is clearly a great deal more than it is worth. We should be doing the cheapest first, and will probably never get to give-away feed-in tariffs for domestic microgen. I dare say this position may be unpopular but it is part of my crusade to promote what is practical at the expense of what is symbolic.


These problems all exist in the zero carbon paper, which, furthermore didn't seem to propose enough to bring emissions down quite that far. Chris has his questionable zeros here too. I didn't seek to oppose or amend the paper because I think it has basically the right approach, as does this chapter.