The dark side of climate change policy

The government recently announced a series of measures designed to make Britain a low-carbon economy, including a large expansion of renewable energy (primarily wind), grants for better home insulation and a so-called green transport strategy. Under the Climate Change Act, the UK is “legally bound” to reduce CO2 emissions by at least 26% by 2020 and 80% by 2050 (relative to 1990 levels).

Meeting such ambitious targets will require substantial investment and while ministers have emphasised alleged advantages, such as the creation of 400,000 “green jobs”, there has been little acknowledgement of the wider economic impact.

Higher energy bills and transport costs are likely to be devastating for many businesses. Some enterprises will be forced to close. Others will relocate to locations where energy and transport are cheaper and environmental regulations less burdensome. In some instances, potential entrepreneurs won’t even bother starting new ventures in the UK. Overall, jobs are likely to be lost rather than created.

Then there is the impact on the less well off. People on benefits, for example £64 per week Jobseeker’s Allowance, may already be using around one third of their (non-housing) incomes to pay utility bills inflated by existing environmental policies.

If this share increases further, there will be strong pressure to raise welfare benefits and winter fuel payments to compensate. Taxes will have to rise accordingly and the already weak incentives to enter low-paid work will be further undermined.

However, the most devastating impact of climate change policy is likely to be on the developing world. While some middle income countries may benefit initially from the flight of businesses from rich nations, it is unrealistic to think that a large upward shift in the level of political control and central planning can take place in the West without negatively affecting the Third World.

The resulting misallocation of resources will hamper entrepreneurship and innovation leading to reduced wealth creation. And restricted and constrained markets will inevitably limit the opportunities for trade, thereby hindering economic development.

The impact of climate change policy therefore goes far beyond landscapes ruined by wind turbines and higher electricity bills. Big cuts in CO2 emissions are likely to prolong the misery of hundreds of millions of the world’s poorest.

Politicians like talking about climate change because it makes them sound virtuous and on the side of the angels. However, what they will not admit is that dealing with climate change will be phenomenally expensive and only achievable for us in the West if we can persuade the developing world not to develop and accept permanent poverty. Indeed, this is how we ought to frame the debate – clear air for us, poverty for you – because we cannot do what Gore and Stern want us to do and maintain our way of life, not unless we can export our problems to Africa and Asia and keep them there.

Attending the ‘Cabinet’ in Cardiff I learnt from a major house builder that climate change regulation will1. Add £16,000 to the cost of an average 2.5 bed house – About 10%.2. Substantially delay development applications which will contribute toward creation of the next property bubble

Within human history Florida was twice as wide as it is today. I wonder who caused that global warming. Too many red Indian smoke signals?It has also been colder. In Dickens days the Thames froze in winter. The world is warming on average. That trend has been going on for ten centuries. Mankind did not cause that. Whether mankind is aggravating the trend is open to debate. It makes sense to reduce pollution, but central government planning tends to backfire and aggravate the problem.

How can any sane person believe the propaganda about 400,0000 green jobs after reading this: http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable...., Denmarks experience with wind generation is awful, see: http://centurean2.wordpress.com/2009/05/17/denmark-wind-farms-a-terrible... and it would seem that Germany’s adventure into the business has also been a failure, see: http://www.timesonline.co.uk/tol/comment/columnists/dominic_lawson/artic...

Richard, quite right about the absurdity of most of the policies, targets and economic claims, and the negative impacts they will have. And I say that (as you know) as a long-term investor in renewables. No one with a credible record in the industry believes we can achieve the renewable and carbon targets, and the sensible ones don’t think we should.But you are wrong about domestic energy. It is much too cheap, not too expensive. It incurs little cost from green measures, and gets favourable treatment compared to other energy-uses. It’s hard to provide the evidence in a comment, so I have posted the explanation at http://www.pickinglosers.com/blog_entry/bruno/20090801/poor_consumers .

Bruno,
not sure if this is comparing like with like:
“Denmark and Sweden, with much higher energy costs than the UK thanks to very heavy carbon and fossil-fuel taxation, have so little “fuel poverty” … because they have very high-quality housing … And why do they have high-quality housing? Because energy is expensive”
I guess that Scandinavian houses are not only more energy efficient, but have higher building standards in general, because they are newer on average. It’s the planning system that impedes new construction, and lower energy efficiency on average.
But I agree that symptom treatments like differential VAT rates are a poor solution.

There might be a number of factors, Kris, but it would be a strange thing for the IEA to argue that price was not relevant to demand. After all, new houses aren’t intrinsically high-quality. You have to build them to the standard. And what influences the choice of the standard to build them to? If you have experience of British builders, you will know there are the Building Regs standards that they claim to build to, and there are the standards that are actually built.

There is a danger that if environmental building standards are too high they will act as a disincentive to the construction of new housing. Jack Dance (see comment above) gives an estimate of £16,000 per new home as an average cost. As house prices fall this represents an increasing share of the build costs and will make some projects uneconomic. In environmental terms this may be counterproductive, since even without the recent crop of green building regulations, new houses would be far more energy efficient than draughty old Victorian ones. I would also like to see some kind of cost-benefit analysis of recent regulation.

Richard, That’s a very important point. That is yet another reason why it is better to use demand pull than supply push or regulation. More expensive energy encourages people to look for the cheapest ways of cutting their bills, rather than pushing expensive, one-size-fits-all or bureaucratically-complex solutions at them when those solutions don’t offer sufficient savings to justify the cost.

Politicians like talking about climate change because it makes them sound virtuous and on the side of the angels. However, what they will not admit is that dealing with climate change will be phenomenally expensive and only achievable for us in the West if we can persuade the developing world not to develop and accept permanent poverty. Indeed, this is how we ought to frame the debate – clear air for us, poverty for you – because we cannot do what Gore and Stern want us to do and maintain our way of life, not unless we can export our problems to Africa and Asia and keep them there.

Attending the ‘Cabinet’ in Cardiff I learnt from a major house builder that climate change regulation will1. Add £16,000 to the cost of an average 2.5 bed house – About 10%.2. Substantially delay development applications which will contribute toward creation of the next property bubble

Within human history Florida was twice as wide as it is today. I wonder who caused that global warming. Too many red Indian smoke signals?It has also been colder. In Dickens days the Thames froze in winter. The world is warming on average. That trend has been going on for ten centuries. Mankind did not cause that. Whether mankind is aggravating the trend is open to debate. It makes sense to reduce pollution, but central government planning tends to backfire and aggravate the problem.

How can any sane person believe the propaganda about 400,0000 green jobs after reading this: http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable...., Denmarks experience with wind generation is awful, see: http://centurean2.wordpress.com/2009/05/17/denmark-wind-farms-a-terrible... and it would seem that Germany’s adventure into the business has also been a failure, see: http://www.timesonline.co.uk/tol/comment/columnists/dominic_lawson/artic...

Richard, quite right about the absurdity of most of the policies, targets and economic claims, and the negative impacts they will have. And I say that (as you know) as a long-term investor in renewables. No one with a credible record in the industry believes we can achieve the renewable and carbon targets, and the sensible ones don’t think we should.But you are wrong about domestic energy. It is much too cheap, not too expensive. It incurs little cost from green measures, and gets favourable treatment compared to other energy-uses. It’s hard to provide the evidence in a comment, so I have posted the explanation at http://www.pickinglosers.com/blog_entry/bruno/20090801/poor_consumers .

Bruno,
not sure if this is comparing like with like:
“Denmark and Sweden, with much higher energy costs than the UK thanks to very heavy carbon and fossil-fuel taxation, have so little “fuel poverty” … because they have very high-quality housing … And why do they have high-quality housing? Because energy is expensive”
I guess that Scandinavian houses are not only more energy efficient, but have higher building standards in general, because they are newer on average. It’s the planning system that impedes new construction, and lower energy efficiency on average.
But I agree that symptom treatments like differential VAT rates are a poor solution.

There might be a number of factors, Kris, but it would be a strange thing for the IEA to argue that price was not relevant to demand. After all, new houses aren’t intrinsically high-quality. You have to build them to the standard. And what influences the choice of the standard to build them to? If you have experience of British builders, you will know there are the Building Regs standards that they claim to build to, and there are the standards that are actually built.

There is a danger that if environmental building standards are too high they will act as a disincentive to the construction of new housing. Jack Dance (see comment above) gives an estimate of £16,000 per new home as an average cost. As house prices fall this represents an increasing share of the build costs and will make some projects uneconomic. In environmental terms this may be counterproductive, since even without the recent crop of green building regulations, new houses would be far more energy efficient than draughty old Victorian ones. I would also like to see some kind of cost-benefit analysis of recent regulation.

Richard, That’s a very important point. That is yet another reason why it is better to use demand pull than supply push or regulation. More expensive energy encourages people to look for the cheapest ways of cutting their bills, rather than pushing expensive, one-size-fits-all or bureaucratically-complex solutions at them when those solutions don’t offer sufficient savings to justify the cost.

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