Let us set aside the argument about whether global warming is a serious threat that we can address through Government policy. Let’s assume that it is. Given the threat, should we go about reducing carbon emissions in the most expensive way possible? Of course not. Instead, we should allow households and firms to find the most efficient ways to economise on carbon emissions.
The most efficient way to reduce carbon emissions would be to either tax them or to cap emissions and allow trading. Carbon cap and trade, for example, means that, if energy company ABC has found a really efficient way to reduce carbon emissions, it can sell its carbon allowance to company XYZ which is struggling to get its technology to work. Taxing carbon emissions means that people would consider whether they want to respond by buying a more efficient fridge, switching the heating down or buying energy from the cheapest renewable source.
Instead, we have the Government second guessing the market and subsidising all sorts of different ways of reducing carbon emissions some of which – such as offshore wind – are horrifically expensive. Not surprisingly, policy has become entirely incoherent as we saw at the party conferences recently. David Cameron is lauding the number of people who are producing windmills whilst Owen Paterson seemed to be calling for an about-turn in policy. As far as the Prime Minister’s comments are concerned, if he thinks that it is beneficial for the Government to promote the development of an industry that produces electricity in an incredibly inefficient way, then it is no wonder that we have a productivity crisis.
At the same time, George Osborne now appears to want to provide tax subsidies for shale gas – which is most definitely not carbon neutral – and is berating the energy companies for raising prices. He should look at the beam in his own eye. Energy company profit margins are worryingly low, but energy costs have been raised enormously because of the government’s inefficient green agenda.
What would a Government with real courage – one that actually cared deeply about this issue – do? It would raise value added tax on domestic fuel consumption to the full rate of 20 per cent, whilst making a corresponding reduction in other taxes on the less-well-off.
We are implicitly subsidising domestic fuel consumption by not charging the same rate of VAT as we charge on other products. At the same time, we are providing subsidies to inefficient methods of generation – some of which, such as wind power, are not even effective in cold, still weather.
If the Government were to go beyond this policy, the least damaging option would be to exempt all renewable forms of energy from VAT and add an additional carbon tax to carbon-intensive production. The Government need do no more. There is no need for the Government to guess whether wind power is better than wave power. The market will determine the most cost-effective way to reduce carbon emissions.
This article originally appeared in the latest issue of House Magazine.