Friday 21 May 2010

Backdoor subsidies

One of the approaches which has been used to try and encourage 'market forces' to operate in ways which reduce emissions rather than increase them was the introduction of carbon trading schemes. In essence, having to buy permits to release emissions into the atmosphere was intended to encourage investment in emissions reduction.

I've always been sceptical about the whole approach. Those wedded to the concept that markets can and should drive all or most decisions like the idea of course – and certainly prefer it to regulation and coercion. But the problem with markets is that they can, and frequently do, operate in ways which have unintended consequences.

In the case of carbon trading, the price has at times been so low that it has been cheaper for companies to buy the permits and carry on polluting than to do anything to reduce emissions. And if that's what helps their profitability, that's what the 'markets' will encourage them to do.

The system has also led to increasingly complex financial instruments being created around carbon permits, and the main operators in the carbon markets are not the companies creating the emissions, nor those involved in reducing emissions, but the banks and the financial institutions. It's a situation which, in an only slightly different context, almost led to a complete melt-down of our financial systems.

The system is a complete failure, and is doomed to remain such – what we actually need are statutory enforced limits on emissions. The free marketeers will never accept that, and instead choose to believe that simply manipulating the market a bit further can overcome the problems.

Which brings me to the Tory/Lib Dem coalition agreement. One of the commitments made by the partners in their agreement is to 'introduce a floor price for carbon', and another is to 'persuade the EU to move towards full auctioning' of permits. Tinkering with a flawed concept to try and make it work is a fundamental mistake - and will have consequences beyond those specifically intended.

Certainly, setting a high enough floor price will do more to encourage the reduction of emissions, since it overcomes one of the problems referred to above – namely that it can be cheaper for companies to buy permits than to reduce their emissions. But it is also a backdoor way of making nuclear power more financially attractive, since it effectively transfers the financial risk from those who build and develop the power stations to the consumers of the energy which they produce.

Contrary to the stated policy of the Tories that there will be no subsidy for nuclear power, this proposal effectively achieves the same aim by another route. It could also further encourage the transfer of emissions generators from high carbon priced zones to low carbon priced zones - merely moving the problem from one place to another rather than actually dealing with it.

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