Carbon markets alone aren’t the answer to our climate woes
It is apparent to anyone who follows the politics of energy in this country that there are fundamental differences of opinion between George Osborne’s Treasury and the Department of Energy and Climate Change. At the core of the argument is the question as to whether the Government should take the UK’s climate laws seriously and commit to a target for an almost carbon free power sector by 2030, or simply “dash for gas” on the highly questionable assumption that this is the cheaper option.
Proponents of simply relying on gas frequently promote the argument that governments should not seek to “pick winners” in energy policy by, for example, providing support to renewables which cannot yet complete with fossil fuels. Instead, they say, we should put in place a carbon price which should in theory deliver emission reductions where they are most cost effective, and let the market decide what gets built.
Last month, Dr Rob Gross of Imperial College published On Picking Winners a report funded by WWF that highlighted serious flaws in the argument of those who suggest that the carbon price will do it all.
Carbon pricing is potentially a valuable tool to tackle climate change but it has serious limitations. On its own it is seen by investors as vulnerable to future politically driven changes. This is particularly the case for the UK’s proposed carbon price floor which is likely to be significantly above the EU ETS price and may therefore prove to be increasingly controversial from a political perspective. For this reason, investors do not see a carbon price on its own as being a reliable enough long-term investment signal to commit millions to renewable energy projects or supply chain infrastructure, which could help re-balance the economy and create a thousands of new jobs.
The problem is compounded by the fact that setting the carbon price high enough to bring forward emerging technologies such as offshore wind would be unlikely to be considered credible by investors. It would also be a very inefficient way of getting investment given that it would result in a windfall for existing low carbon generators.
Instead, a carbon price set at a politically feasible level is much more likely to encourage a switch from high carbon coal to medium carbon gas. This may achieve modest emission reductions in the short term but simply switching all the UK’s coal power stations for gas ones would still leave power sector emissions at around six times the level that they need to be by 2030. Overreliance on gas also has price and security of supply implications given that 65% of UK gas supply is now imported. This point was unwittingly highlighted last week by Lord Howell, who advises the UK government on energy issues, and was filmed by Greenpeace proclaiming that “if anything should lead to unrest in Qatar then the UK would be up shit creek”.
So what is the alternative? The UK has the potential to become a world leader in the growing global markets for marine renewables, electric vehicles and even CCS, bringing in highly skilled jobs and investment at a time when they are sorely needed. These technologies do not just magically appear fully formed. They need clear policy frameworks providing stable and predictable regulatory and financial support along the lines of the existing Feed in Tariff regime.
Yes, support needs to reduce over time and be set at levels which do not over-reward project developers. But these are the policies which will enable new, promising technologies, to improve their performance, reduce their costs and reach a level of maturity where they can compete easily with gas generation which, let us not forget, has reaped plenty of subsidies of its own in the past. If this is ‘picking winners’, then fine but it’s better than ending up with a heavy reliance on imported gas, missed climate targets and a missed opportunity to develop a highly skilled industry in marine renewables and other low-carbon technologies.