Author: Professor Robert Lowe, Director of the UCL Energy Institute, first posted on the UCL Energy Blog 27 Oct 2015

On Tuesday 20 October 2015, UCL Energy Institute, UCL Institute for Sustainable Resources, UKERC and the French Embassy hosted ‘Global Energy, Global Climate’. This was the first in a series of three events organised jointly by UCL Energy Institute and the French Embassy (under the auspices of the long-established relationship between the French Embassy’s Science and Technology Department and UCL’s Grand Challenges programme), to be held termly through the 2015-16 academic year.

For an evening event on Energy and Climate Change, in the middle of Global Climate Change Week and in the run-up to COP21, it would have been hard to think of a better line-up of speakers – Jean-Charles Hourcade (Centre National de la Recherche Scientifique, CNRS), Jim Watson (UKERC Research Director, Paul Ekins (Director of UCL Institute for Sustainable Resources), Jim Skea (ex-UKERC Research Director and IPCC WGIII co-chair) and our discussant, Jill Duggan (Doosan Babcock).

Jean-Charles gave a fascinating summary, peppered with memorable epithets, of the attempts that have been made since 1988 to craft an international agreement that would limit global CO₂ emissions (and yes, there are other GHGs, but CO₂ accounts for roughly 2/3 of man-made climate forcing). Those who rail against the glacial rate of progress over almost 30 years, would do well to reflect on the real complexities of the negotiations.

Paul Ekins, Jim Skea, and Jim Watson then set out some of the key findings and arguments from the latest UKERC book, Global Energy: Issues, Potentials, Policy Implications. Paul reflected on choices and policy challenges, Jim Skea on on-going developments in global energy markets, among them the very high rate of growth of renewables, and Jim Watson on the complexities of the innovation process – the importance of learning-by-doing, the long time scales to deploy new technologies at scale, and the low probability of university-based researchers finding a silver bullet that will solve the problems of energy and climate change.

Jill Duggan gave a masterful summing up, reflecting on how, despite disappointments, there are signs of progress – among other things, she stated that it would now be inconceivable to propose the construction of a new, unabated coal-fired power station in the UK. It is less than ten years since E.ON proposed the construction of two new coal-fired units, at Kingsnorth. Perhaps her most memorable point was that credibility is one of the most important resources that governments have to drive through what may prove to be the most difficult infrastructural, social and political transition of the last two centuries.

The panel discussion was memorable both for the level of agreement, and one notable disagreement – on the feasibility of carbon taxation. All participants agreed on the desirability of carbon pricing, but Jim Skea, Jim Watson and Jill Duggan thought that carbon taxation was very unlikely to be the best way to achieve it. Jean-Charles described how, in the 1990s, key EU governments worked to frustrate attempts to introduce EU-wide carbon taxation. No UK government would have the credibility to make it stick, and in the absence of long-term certainty, it would be largely ignored by industry. There are spectacular outliers – Denmark and Sweden – which have maintained very high levels of energy and carbon taxation, in the case of Denmark since the late 1970s. But those of us, like Paul Ekins and myself, who have argued for twenty years for carbon taxation, would do well to understand the political problems elsewhere.

My own conclusions after having chaired this event? The fossil fuel age will prove much harder to get out of than to get into – those who are yet to be persuaded of this would do well to read the reports of the Deep Decarbonisation Pathways Project undertaken by UCL-Energy and IDDRI (another Anglo-French collaboration), and perhaps McGlade & Ekins paper, The geographical distribution of fossil fuels unused when limiting global warming to 2°C, http://www.nature.com/nature/journal/v517/n7533/full/nature14016.html.

Thomas Kuhn’s description of the nature of the scientific crises that precede scientific revolutions (paradigm shifts) seems to me to be a useful metaphor for the challenge of climate change and our attempts to solve it – and here I paraphrase: the accumulation of widely disparate problems that initially attract a series of incremental responses; the generation of a host of new ideas, many of which ultimately fail to be taken up, but some of which point the way to a new paradigm; a growing sense of disorientation and crisis as it becomes clear that ways of tackling the underlying problems that have been successful historically, no longer appear to work; and finally, resolution, as the new paradigm with all of its technical, social, economic, and political dimensions is articulated and entrenched.

Posted to the Energy and Carbon Blog on : 05 Nov 2015 by UCL Institute for Sustainable Resources‘ Director, Paul Ekins

There is growing bewilderment practically everywhere about what the still relatively new UK Government is doing is respect of energy policy. The mantra since the election is that energy policy is to be re-set to achieve decarbonisation targets, to which the government says that it is still committed, in a more cost-effective way that will benefit the ‘hard-working families’ to which the government says that it is also committed. Unfortunately it is quite impossible to recognise this laudable objective in the policies that have so far been implemented, especially those which use those policies called economic instruments – basically taxes, charges and subsidies – which are the subject of this blog.

Firstly, relatively low subsidies for the cheapest low-carbon energy source, onshore wind, are to be removed early, and planning permission has been made more difficult to secure even for those plants that do not need subsidy. Secondly, subsidies for the second cheapest low-carbon energy source, solar PV, seem likely to be drastically cut, just when industry sources thought that they were only a few years from being able to be subsidy-free, but depended on continuing support to get there. Over 1,000 jobs in the solar industry have already gone, with more losses predicted if the subsidy cuts are followed through. These once hard-working families at least will find it difficult to discern the government’s concern for their welfare.

Of course, it is right that mature industries should be subsidy-free, and one might applaud the government for its aspirations, if not its timing, on this point, were it not for the fact that it is storming ahead with giving a very large subsidy to Hinkley Point C nuclear power station, including a price guarantee that will cost consumers an extra £4.4 bn to £20 bn, on the government’s own figures, with various credit guarantees, insurances and derisking subsidies on top. Yet nuclear power is a mature industry if ever there was one, and one whose costs, unlike those of renewables, resolutely refuse to fall and in this case will impact hard-working families and other energy consumers for 35 years from the date of first generation.

It now looks almost certain that when power from Hinkley Point C finally comes on line, it will be substantially more expensive, and therefore more heavily subsidised, even than offshore wind, which was once thought to be unassailable as the most expensive low-carbon energy source.

In short, the government’s subsidy policy is anything but cost-effective, and will maintain a burden on hard-working families for decades and everyone else, whilst eschewing energy sources that would seem only to need a few more years’ support.

The credibility of the government’s repeated stated commitments to both cost-effectiveness and emissions reduction is fatally undermined by its removal of the specific tax incentives for energy efficiency and renewables, which score at the top of the range on both counts.

So to the tax side of economic instruments, concerning which there have been two major changes from the new government in its Summer Budget 2015. First, the exemption from the Climate Change Levy (the tax on the business use of energy) which was accorded to renewable electricity sources has been removed. This was announced in July and took effect from August 1st, without any prior consultation, thereby depriving renewable generators of a source of revenue (currently £5.54/MWh) which they will certainly have factored into their business plans when these were created – and bidding competitively for government contracts. While perhaps not technically retrospective legislation, such a change is devastating for business confidence in the stability and predictability of government policy, something which this government, as others before it, claims to be committed to. For example, a recent government consultation paper relevant to this blog, ‘Reforming the business energy efficiency tax landscape’, states: “The government is committed to developing an effective framework that provides businesses with certainty and encourages business investment in energy efficiency and carbon saving” – an assurance that might be expected to attract the cynical riposte from renewable generators at least: “At least until the next Budget” – this change is expected to increase government revenues (if current investment plans still proceed with the corresponding added cost) by about £900 million by 2020.

The other energy-related tax adjustment in the Summer Budget was the abolition, apart from in the year of purchase, of the gradation of Vehicle Excise Duty according to the vehicle’s calculated carbon dioxide emissions per km travelled. Before the Summer Budget this ranged from £0 (for 0-100 gCO2/km) to £505 (for over 255 gCO2/km) per year. The Summer Budget changed this such that all new registrations from April 17 will pay a flat rate of £140 per year (with a £310 supplement for cars with a list price of more than £40,000), including vehicles with emissions of 1-50 gCO2/km per year. The new first-year rates range from £0-2,000, compared to £0-1,100 under the current system. The change is expected to increase the tax take by about £1 billion per year by 2020, with the main losers the drivers of low-emission vehicles.

In sum, this is a very strange way for a government to proceed when it claims to be interested in business investment in energy efficiency and carbon saving, both of which require some confidence in the stability of government policy which this government’s actions over the last six months have done much to destroy. What does this say about the likely outcome of the consultation on the ‘business energy efficiency tax landscape’?

One tax from the last government that has so far survived the energy policy activism of this one is the carbon price support (CPS). This was originally intended to rise at a rate reflecting the Treasury’s estimated ‘social cost of carbon’, but in the face of political concern about energy bills this ‘escalator’ was halted in the 2015 budget, with the CPS at around £18/tCO2until 2020. Apart from earning the Treasury around £2 billion a year, this tax plays a crucial role in reducing emissions from UK coal-fired power stations, with the removal of the CCL exemption for renewables the government seems to be drawing a distinction between taxes for climate policy, such as the CSP, and taxes for energy efficiency, such as the CCL and the other instruments mentioned in the consultation paper.

As far as these instruments are concerned, some simplification of the tax landscape can surely be expected. The main question is whether this will level up or down the effective rate of energy taxation. Even though these taxes will be denominated in energy, it would be desirable for their rates to be based on the energy’s carbon content. The government’s carbon price trajectory for firms outside the EU ETS suggests that this price should now be around £60/tCO2, increasing to £76/tCO2 by 2030. For electricity, the CPF, CCL and CRC (Carbon Reduction Commitment) together add up to about £55/tCO2. For gas, the CCL and CRC add up to much less, only around £22/tCO2. Taxing both these energy types at £60/tCO2 (about £14/MWh for electricity and £11/MWh for gas) would therefore both simplify the tax rates and tie them explicitly into climate policy. The Climate Change Agreement rebates on the taxes for so-called energy-intensive sectors would probably need to be maintained for political reasons. Such an outcome to the consultation would do little to rectify the inconsistencies on the subsidy side of energy and climate highlighted above, but it would at least show that with tax policy the government was more committed to tax efficiency than its predecessor, without being less committed to emissions reduction, as it states.

Prof Paul Ekins OBE is Director of the UCL Institute for Sustainable Resources and Professor of Resources and Environmental Policy