The politics of renewables targets
Matthew Lockwood, formerly of the upmarket think tank IPPR and now at Exeter University, has written a thought-provoking blog on carbon pricing. Lockwood argues that the current vogue for carbon pricing over renewables targets underplays the political problems of such system. Always keen to follow the latest economic fads, we at PX have been pushing carbon pricing over technology specific targets for a long time. So where do we disagree with Lockwood’s points (see here and here for more detail )?
- Cap and trade needs some technical fixes. He is absolutely right, and we make some clear recommendations here. That does not, of course, mean that the principle behind the ETS is wrong. Implementation is not easy, but the third phase of the ETS is better than the second, which was better than the first. All have delivered the environmental outcome for which they were designed.
One area where I think the blog is completely wrong is volatility. By choosing cap and trade over a straight tax it was obvious you would get a price that moved (rather than a volatile quantity of carbon reduction). More broadly, the energy debate seems to be obsessed with the idea that volatility is a bad thing. In the case of electricity prices, low volatile prices are better than guaranteed high prices.
- Marginal pricing. Lockwood is of course right that if you push up the price of carbon, that pushes up the marginal price of electricity. This is because, at present, all power generators are paid the price set by the marginal plant. At the moment, in the UK, that is mainly gas. As a result, those low carbon power sources like nuclear and wind get a higher price through the wholesale market than they would without a carbon price.
Of course, this is exactly what you want. You want to create higher profits for low carbon generation. This means that new entrants will scramble to get their grubby mitts on that excess profit. This means more and more low carbon plant (all other things being equal). This fossil-fuel plant will run less frequently and we therefore have lower emissions from the power sector. Eventually it will mean that even the marginal plant is low carbon. This will take a while, but that is what we are aiming for by introducing a carbon price.
- Carbon pricing or carbon taxes are too difficult politically. I am not convinced of this, mainly because both already exist in some form in different markets. In fact, in the UK we have managed to introduce a carbon tax on top of the ETS, despite general hostility to taxes that Lockwood identifies (or perhaps because of them). It is certainly not straightforward to keep them in place (see Australia), but it is patently possible. Moreover, it is far from clear that the public are wild about the alternative, which is a bucket-load of technology-specific subsidies.
- Who gets the rents? Lockwood’s final point is about making sure that rents go to the right people (i.e. communities rather than the government or business) is an interesting one. He argues for more of the German model where communities are much better at grabbing the subsidy pot.* This means there is less opposition to green transition in general (and RE subsidies in particular). There is something in this, although how important community energy can be in the transformation of our electricity system is unclear. As always, the questions are how much extra should we pay for such a community-based approach and could we do things more cost-effectively? Germany has a much stronger green political movement, which certainly helps.
Many of these points boil down to the need for more political will. The only way you overcome the political problems of a carbon tax or cap and trade, or indeed renewable energy support system, is by being better at the politics. You need to convince people that what you are doing is important and that the way you are doing it is fair. No clever technical fixes or community stakeholdings can conceal that overwhelming political challenge.