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Andrew Tyrie (MP): UK Government Should Re-Examine Climate Change Policy

Climate change policy now threatens to reduce competitiveness by forcing up business costs. The Coalition should reexamine measures, such as the carbon floor price, that are more rigorous than those undertaken by other EU countries.

Excerpts from Andrew Tyrie’s paper ‘It’s The Economy’ published by the Centre for Policy Studies, p. 18-21

Climate Change Policy

There are many areas in which the politics of abundance are still in evidence, clashing with policies for improving economic performance, and in which changes of direction are needed. Climate change policy is one such, developed by the last administration but broadly supported by Conservatives and Liberal Democrats, competing to burnish their green credentials, in opposition.

This policy now threatens to reduce competitiveness by forcing up business costs. The impact of the EU’s Emissions Trading Scheme has so far been vitiated by a generous issue of allowances and the impact of recession. From 2013, however, the screw will be tightened with a gradual reduction in allowances, just as economic recovery may be increasing demand, and a

move to auctioning them rather than giving them away. The Coalition also acted unilaterally in the 2011 budget to set a floor price for carbon. I agree with the Energy and Climate Change Select Committee which noted that this measure, “introduces political risk with little evidence of the supposed benefits.” The Committee also noted its potential risks to energy security (by increasing reliance on cheaper energy imports) and impact on some intensive users of electricity. [12]

Policy is also tilted sharply in favour of renewables, especially wind; this is, in the Select Committee’s words, “an expensive way of achieving decarbonisation of the electricity sector.” The mechanisms intended to achieve this, such as feed-in tariffs, are likely to provide the strongest financial support to the most expensive forms of renewable energy, locking the UK into highcost energy for years to come.[13]

None of this looks easy to justify on supply-side grounds. The Department of Energy and Climate Change has estimated that non-domestic energy bills will be 26 per cent higher by 2020 than would otherwise be the case because of climate change and energy policies.[14] The huge investment required to achieve environmental targets (estimated at over £200 billion, significantly higher than that of other major European economies) will require a major transfer of funds to the energy sector.[15]

The impact on energy intensive industries such as steel, aluminium, chemicals and fertilisers could be particularly significant. It comes with the risk of “carbon leakage” – that is, jobs and economic activity (as well as the associated carbon emissions) leave Britain for elsewhere, damaging our economy while doing nothing to reduce global emission levels. Nor is concern limited to traditional industries; Britain’s competitiveness in parts of the service sector with high energy demand such as data centres may also be affected.[16] And the higher bills faced by small businesses and traders could turn out to be the most damaging if least noticed of all.

The growth strategy must challenge these economic contradictions. Lower relative costs for business are essential. As Lord Turnbull, the former Cabinet Secretary and Permanent Secretary to the Treasury has recently and trenchantly observed, we need our political leaders to abandon “dogged unilateralism” and “pay more attention to the national interest and less to being global evangelists.”[17] The Coalition should reexamine measures, such as the carbon floor price, that are more rigorous than those undertaken by other EU countries. It should also reopen with international partners, particularly in the EU, a debate over the economic consequences of its proposed route to decarbonisation and reconsider its speed of trajectory, too. The Coalition should also jettison the absurd notion that renewables policy should be judged on the number of jobs allegedly created.[18]

Notes:

[12] House of Commons Energy and Climate Change Select Committee, Electricity Market Reform, Volume 1, May 2011, pp. 4, 44-6.

[13] Electricity Market Reform, pp. 14-5; Matthew Sinclair, Let Them Eat Carbon: The Price of Failing Climate Change Policies, and How Governments and Big Business Profit from Them, Biteback, 2011, p. 105. 20

[14] Department of Energy and Climate Change, Estimated impacts of energy and climate change policies on energy prices and bills, July 2010, p. 3. Some of the assumptions in that study will no longer hold – notably the funding of the Renewable Heat Obligation has been changed from the plans set out under the previous administration – but the general point is still valid. The Department assumes significant energy saving by consumers, so the projected increase in prices will be still higher than the increase in bills.

[15] Sinclair, p. 110. See also Peter Atherton, Citigroup Global Markets, presentation at University of Exeter Energy Week, 20 May 2011: http://www.exeter.ac.uk/few/documents/presentations/Peter_Atherton_Keynote.pdf

[16] Waters Wye Associates, The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries – Update Against New Government Policy: a Summary Report for The Energy Intensive Users Group, March 2011. See: http://www.waterswye.co.uk/EIUG%20Carbon%20Tax%20Update%20201103.pdf; and The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries – Are Policies Effectively Focussed? A Summary Report for The Energy Intensive Users Group and the Trades Union Congress, July 2010. See: http://www.waterswye.co.uk/WWA%20Impact%20of%20Climate%20Change%20Policies%20EIUG%20TUC%202010723.pdf; Sinclair, pp. 173-80

[17] Andrew Turnbull, The Really Inconvenient Truth Or “It Ain’t Necessarily So”, The Global Warming Policy Foundation, July 2011, p. 15.

[18] Gordon Hughes, The Myth of Green Jobs, The Global Warming Policy Foundation, August 2011.

The Author

Andrew Tyrie has been the Conservative Member of Parliament for Chichester since 1997. He is Chairman of the House of Commons Treasury Select Committee. This publication reflects his personal views.

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