Environmentalists are undermining their cause by defending emissions trading

We should hope that the British government realises what the EU does not and withdraws from the EU ETS and presses for its dismantling, replacing it with a simple carbon tax

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Just what are so called environmentalists looking for?
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David Merlin-Jones
On 6 January 2012 17:05

Mr Morris suggests that our criticism of the energy sector is misplaced and suggests ‘the electricity sector has consistently shouldered the greatest effort under the scheme’. Hardly. The European Energy Centre of the Netherlands has shown energy companies are raising bills, despite the credits they receive being mostly free.

Point Carbon estimates that the power industry in five countries including the UK will have made €16 to €50 billion by the end of the year by passing on this non-existent ‘cost’ to consumers (figures have been updated to account for the fall in credit price).

There is evidence to suggest that even once power companies face full credit auctioning from next year, this cost will just be passed on to consumers, with noticeable bill rises as a result.

Mr Morris’ defence of the EU ETS, which he claimed is not ‘completely flawed’, is centred on the ability to increase the price of carbon credits. At present they cost €7, a 50 percent reduction in value in just over six months. This cannot drive investment in reducing emissions, but Mr Morris hopes that by ‘adjusting the supply’, i.e. the EU reducing it, the price will rise.

Given the whole reason for choosing a cap-and-trade mechanism over a carbon tax was to leave the scheme to market forces, to do this is tantamount to admitting defeat. Indeed, if the precedent of political meddling in the scheme is set, investor confidence will have to take this into account as well!

The only way to guarantee long-term investor confidence in carbon reduction (which is surely what the EU and environmentalists want) is through a carbon tax. Economist after economist has demonstrated that while cap-and-trade and a tax might have the same outcome in theory, in the real world, only a tax works.

The EU ETS incentivises making small emission cuts to meet the slowly falling cap, so more expensive technologies that offer large reductions are overlooked, even if they offer a wider benefit to society. Indeed, even amongst some climate change sceptical economists, who would argue against the need for any action on CO­2, if it had to happen they would rather a carbon tax was established, because, if it has to happen, they would rather it works.

CO2.1 should appeal to any open-minded environmentalist. The trans-European carbon tax it posits as a replacement to the EU ETS and all other green charges will cost less for businesses and consumers alike but will deliver more revenue than the ETS will at its best: £9 billion in the UK alone if set at £30 per tonne of CO2, as opposed to £4-8 billion in ETS revenues.

We should not forget that the British Government has rejected the idea of hypothecating ETS monies for energy investment. Instead, it goes into general funds, risking the idea of being seen as a stealth tax.

Focusing on Britain, we argue that this should be used for two purposes: firstly, to eliminate all fuel poverty via the highly successful Warm Front scheme, and secondly, investment in bringing down the cost of low-carbon energy. If a low-carbon power supply is wanted, then there is no reason not to invest in making this cheap, to the benefit of society and the economy.

Mr Morris claims we want ‘specifically nuclear power’. This is factually wrong. The report discusses five potential future sources of low-cost, low-carbon power, of which uranium power is one and thorium power another. The other three are renewables.

He also implies we want the state to pick power source winners. This is also incorrect. The report describes this as ‘discredited’ and cites the example of the government subsidising inefficient, expensive off-shore wind turbines, a point Mr Morris forgets when he claims that there has been no government intervention ‘all along’.

It is a shame that an opportunity for constructive debate has been missed by the Guardian. We can only hope that the British Government realises what the EU does not and withdraws from the EU ETS and presses for its dismantling, replacing it with a simple carbon tax.

Yes, we will ‘renege on commitments’ as Mr Morris suggests, but is the only way to actually make the real emission reductions that our government seems to want, and to do so without worsening costs for productive businesses and households alike.

David Merlin-Jones is Director of the Wealth of Nations Project at the independent think tank Civitas and author of three books. He specialises in economics, energy and British industry

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