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The UK's Role In Climate Change Depends On Fixing Haphazard Policy

19/10/2016 14:41
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The key challenge to all climate change agreements, argues Yale economist William Nordhaus, is free riding:

"The benefits from investments to reduce emission of CO2 and other greenhouse gases are a global public good. They require costly investments by individual countries. However, the benefits from the lower emissions are spread widely around the world, and the country undertaking the investments will receive only a tiny fraction of the benefits."

"Paris was a resounding success", argued Chatham House after the 2015 United Nations Climate Change Conference was completed. This is in part because it directly addressed the free rider problem through Intended Nationally Determined Contributions to carbon reduction. The UK made its pledges as part of the EU's (pdf) target of a 40 per cent reduction in emissions against 1990 levels by 2030. The Centre for European Policy Studies have laid out how Brexit negotiations in this area might play out here.

The UK's existing legislation prevents us from backtracking. Under the Climate Change Act 2008, "it is the duty of the Secretary of State to ensure that the net UK carbon account for the year 2050 is at least 80% lower than the 1990 baseline." We have generally been doing better than our EU neighbours - delivering a 38 per cent reduction against the 1990 baseline by 2015 despite a growing economy. But Brexit and haphazard government policy threaten this progress.

The issue is how we actually fund the transition that makes the targets possible. "Europe lost its renewable energy mojo just as costs were plummeting to the point where green power is fully competitive without subsidies in more and more parts of the world", argues Michael Liebreich of Bloomberg New Energy Finance. From a peak of $131.7bn in 2011, European investment halved to $58.5bn last year, just 18 percent of the global figure.

The Committee on Climate Change, which helped develop the latest, 2016 Carbon Budget, believes that "it will be necessary to decarbonise all new investment by 2020 for power". In the UK, public investment will not do the whole job. We have £7.7bn of renewable energy projects in the National Infrastructure Pipeline for 2017-18. This falls to £283mn by 2020-21. In the most recent edition of EY's Renewable energy country attractiveness index, the UK had sunk to 13th place thanks to "the UK Government's noncommittal, if not antagonistic, approach to energy policy [which] continues to go against the grain of almost universal global support for renewables."

There's stiff competition for private capital - the largest fund is no bigger (pdf) than $2bn. But Europe's generally stable regulatory environment for energy has meant half of the deals in the private market are concluded here. Post-crisis fears over the Euro that scared off investors elsewhere made UK deals more attractive, but that advantage has well and truly evaporated with the value of the pound.

Germany has as ambitious national targets as we do - by 2050, it also aims to cut 80 percent of fossil fuel energy generation. Their energy revolution or energiewende has already seen half of nuclear power generation replaced by renewables after public concern around the Fukushima meltdown. Significantly, nearly half of investment has come from individual citizens and energy cooperatives. On average, initial investment by each cooperative is around €686,000 - that's €738 per investor. However, because nuclear has been the first to fall out of the energy mix, the share retained by coal means has strictly curtailed the resulting fall in emissions.

So we might be doing better on coordination, but much worse on incentives. Feed in Tariffs - where energy suppliers directly pay for generation and export of low carbon electricity - will be open until 2019 following a review, but after that Government intends to introduce a new, capped system. The Renewables Obligation required UK electricity suppliers to source an increasing proportion of electricity from renewable sources. However, these close to all new generating capacity on 31 March 2017, and closed to wind a year early: in April this year. In their place Contracts for Difference were established as long-term, legally-binding agreements that stabilise prices for low-carbon generation. They're intended to insulate power generators from wholesale electricity price fluctuations and give more certainty about future revenues.

However, argues Respublica, the sheer complexity of this system deters equity investment in renewables, especially by communities. On Hinckley Point, for example, the Adam Smith Institute argues that the contract for difference actually increases the amount of subsidy paid to generators. It has a 'strike price' of £92.50 per megawatt hour, intended to be index linked for 35 years. "So, for example, if the wholesale price of electricity is £47.50 per MWh, the Hinkley Point plant will receive £45 per MWh subsidy. This means that if wholesale prices fall, the subsidies received by the Hinkley Point project will increase."

As Barnaby Wharton, senior energy and climate change policy adviser for the CBI, recently argued:

"We still need to attract huge sums of private investment to keep the lights on and diversify our power mix, and we must maintain momentum on progress made so far. This is not about government hand outs, rather timely policy decisions."

That's certainly true - but if the UK wants to be part of the solution on climate change, communities and even the state's newly rediscovered industrial strategy will need to be part of the mix.

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