Expensive climate change policies are heading for a crash

Mar 08 2010

The Financial Times reports (only available to subscribers) that investment in energy infrastructure is being undermined by uncertainty over policy after the election:

"Ernst & Young, the professional services firm, says that in the next three years energy companies must put £35bn-£50bn of investment in power stations, wind farms and gas storage, to hit government objectives for cutting carbon dioxide emissions while guaranteeing reliable electricity supplies.

Uncertainty over energy policy and the regulatory framework, the firm argues, could cause an "investment hiatus" that would lead to strain on the electricity system later in the decade."

The uncertainty isn't driven by any particular disagreement between the parties - they all have pretty similar platforms in this area - or a lack of clarity on the kind of policies they favour - the most important policies are the renewable energy targets and Renewables Obligation (RO), the Large Combustion Plant Directive (LCPD) and the EU Emissions Trading Scheme (ETS). They are all in place already and no party is pledging to scrap them. The uncertainty is whether the parties will be able to maintain those policies in the face of popular resentment at rising energy prices and a fiscal crisis.

The problem is that, as Citigroup Investment Research reported (not available online), current policies probably require energy prices and energy company profits to double (to pay for all the investment they need to make). At the same time families are also going to be dealing with the policies needed to address the fiscal crisis, and the pressure that is likely to put on their budgets. There is no way that is politically sustainable. We'll go over this in more detail in our upcoming book, but it is pretty clear that if ordinary families are struggling to make ends meet and see energy companies making big profits as prices rise then enormous pressure will grow for one of two things to happen:

1. A big windfall tax on energy companies.

1. The abolition or alteration of one of the big energy policies like the Renewables Obligation.

Either of those options would mean that energy companies wouldn't make the returns they expect on investments to meet the Government's targets. They are walking into a political trap. As they realise that, they will need even bigger returns to justify such a risky investment.

Huge amounts of taxpayers' money is being spent trying to buy support for expensive climate change policies. A new IPN report shows that the EU is providing huge funding to European green NGOS. Recently, we released this video exposing DEFRA funding of climate propaganda:

Despite all that the public aren't convinced. The only reason climate change policies haven't faced a bigger backlash is that consumers aren't aware of the extent to which they are pushing up prices. Energy companies know that the big risk is that the affordability crisis will become such a big issue that the next Government - of whatever party - just can't maintain expensive climate change policies.

The only reliable climate change policies are affordable ones. As Shellenberger and Nordhaus set out back in 2008, you'll only really be able to cut carbon emissions in a big way, around the world, when low carbon energy is cheaper than high carbon energy:

"Carbon caps have failed to reduce emissions all over the world because fossil-fuel alternatives are still much more expensive than current polluting energy sources, and voters and policy-makers are not willing to make fossil fuels so expensive that clean-energy alternatives are economically viable."

Politicians should be focused on making climate change policy more affordable, not making grandiose new pledges. We set out how in a report last year.