We are on the edge of the most radical rebasing of our economy since the Industrial Revolution and we don’t know, and to an alarming degree we are not being allowed to know, whether it is a good idea.
IF AN elected government were embarking on a multi-generational transformation of the country’s society and economy, any reasonable citizen would expect the administration to have looked very carefully into the costs.
If that societal transformation were being sold to the public as an essential insurance policy against an external risk, our reasonable citizen would also expect the politicians to have made sure that the civil service weighed those costs against the supposed threat, to make sure that the public was not being asked to pay a premium disproportionate to the risk.
Scrupulous cost-benefit analyses are the bread and butter of rational government, after all.
But the reasonable citizens of the United Kingdom are in for a shock if they imagine that Mr Johnson and his government have put their climate policy and the drive towards Net Zero Emissions by 2050, through the cost-benefit mill.
In fact Mr Johnson’s administration, in common with every UK government from Mr Blair to Mrs May, is failing to sanity-check the emissions reduction policies and is, indeed, quite deliberately avoiding the subject. This is all the more reprehensible because the sanity check isn’t that difficult. All that has to be done is to compare the cost of reducing emissions, the ‘abatement costs’, against an estimate of the harms resulting from climate change, a much-studied figure that economists refer to as the ‘Social Cost of carbon’ (SCC).
It should be granted, in fairness, that while abatement costs themselves are relatively straightforward, there is considerable uncertainty about how to estimate the SCC. Some analysts lean towards the view that emissions pose no threat, and may even be net beneficial, others that the threat is minor, and yet others that there is a major risk of catastrophic harm to human wellbeing. Debate there may be, but there is a mainstream value, and most analyses fall somewhere in between the extremes, suggesting that the SCC is somewhere around £50 per tonne of carbon dioxide or its equivalent (£50/tCO2e).
Thus, emissions abatement costs that exceed the social cost are obviously irrational; the cure would be worse than the disease.
Our reasonable UK citizen would presume that their government’s Net Zero policies pass this test. This would be wrong. Wrong, firstly to think that the policies sail through this examination with flying colours, but also wrong to imagine that the UK government has any interest in the Social Cost of Carbon. Indeed, it quietly abandoned this benchmark in the early 2000s.
The government’s own statement on the matter, last updated in April 2019, blithely admits that it ‘no longer uses the social cost of carbon’, and in the next breath grants that ‘the SCC matters because it signals what society should, in theory, be willing to pay now to avoid the future damage caused by incremental carbon emissions’.
No convincing explanation is given for this extraordinary and contradictory situation, though it is commonplace Whitehall gossip that social cost was pushed into the shadows because it was embarrassing. None of the abatement policies on offer, renewables for example, is anywhere near mainstream estimates of the SCC. For example, the cost of emissions abatement via an offshore wind farm in the UK receiving subsidy from two Renewables Obligation Certificates per megawatt hour is currently about £500/tCO2, roughly ten times the mainstream figure for the SCC. Some options are cheaper, but some, for example small-scale rooftop solar, are twice as expensive.
No wonder then that the Department of Business, Energy and Industrial Strategy would rather not talk about the matter. But they are fully aware, and they do in fact have estimates of the abatement costs of their policies, embedded in Marginal Abatement Cost Curves. These are not published, but every now and then little bits of information slip out.
For example, alongside the recently published Energy White Paper, Powering Our Net Zero Future, the Department for Business, Energy & Industrial Strategy (BEIS) released a supporting analysis, Modelling 2050, which examined the costs of achieving very low emissions, less than 25g CO2e/kWh, in the electricity sector. In a pair of remarkable charts BEIS revealed that it expected the costs of moving from 25g/kWh to 10g/kWh to be in the region of £200/tCO2e to £350/tCO2e (in 2012 prices), and the cost of moving from 10g to 5g/kWh to be between £600 and £900/tCO2e. (Anyone wishing to dig deeper into this can start by reading my recent paper for GWPF, Who are they Fooling?)
Mind-boggling though those BEIS abatement costs are, the really striking thing about the charts is that they present only a small fraction of the total Net Zero Abatement Cost Curve visible to the White Paper authors. Emissions in the electricity sector are currently about 200g/kWh, but BEIS provides no information of the abatement cost of moving from the present level to 25g/kWh. Why not? For the same reason, one imagines, that it doesn’t like to talk about Social Cost of Carbon: it’s embarrassing.
I don’t know what the full BEIS cost curve would reveal (Freedom of Information request pending), but we can calculate that the average abatement cost under the Renewables Obligation subsidy scheme is at present around £250/tCO2e. And it’s likely to stay that way, or even increase, since in spite of the propaganda, much shamefully coming out of BEIS itself, there is no empirical evidence of substantial falls in the capital cost for offshore wind, while opex (operating expenses) is rising quite sharply (see Gordon Hughes’ study: Wind Power Economics: Rhetoric and Reality). This is a dreadful situation. We are on the edge of the most radical rebasing of our economy since the Industrial Revolution and we don’t know, and to an alarming degree we are not being allowed to know, whether it is a good idea.