UK energy regulator Ofgem’s stark prognosis of the UK’s vulnerability to potential medium term supply shortages implies that this has arisen from a failure of the market, a view seemingly shared by the government with energy and climate change secretary Ed Miliband raising the prospect of a return to capacity payments in an interview with The Times newspaper just days before the Ofgem report was published.
In a striking critique of perceived energy market failings the regulator argued that the ‘unprecedented combination of the global financial crisis, tough environmental targets, increasing gas import dependency and the closure of ageing power stations has combined to cast reasonable doubt over whether the current energy arrangements will deliver secure and sustainable energy supplies.’ And in the week following Ofgem’s report the influential Environmental Audit Committee also expressed its concerns over the effectiveness of carbon trading in reducing emissions, also implying a failure of the market mechanism, although importantly the opposition-chaired parliamentary committee stopped short of calling for the scale of drastic reforms outlined by the regulator.
But Ofgem conveniently omitted one significant event from this ‘perfect storm’ of developments – a UK general election that has to be held by 3 June. With the post-recession economy at best fragile, a mounting national debt, rising energy poverty and challenging renewable and emission targets, energy and climate policymaking is becoming a major electioneering topic.
The regulator has seemingly been forced to act by the opposition Conservatives’ plans for drastic reforms of the regulator’s powers and the industry-wide criticism of Ofgem’s failure to protect customers and deliver effective market competition. Unfortunately the policy reforms outlined by Ofgem, and the interventionist cravings of Miliband, are seemingly based on the incorrect assumption that the UK energy market is broken, with their conclusion being that only radical reform will provide the necessary solution. But the market is not broken; it is just not as effective and efficient as it should be. What are required are amendments to improve the market mechanism’s perceived weaknesses, not a new market model. It is simply too politically convenient to accuse the market of failing to deliver, as Ofgem and the government seem to be doing, and it presents a strong and unjustified case for increased interventionism. It is also too politically convenient to use the recession as a ‘get out of jail’ policy card as the recession has only delayed Britain’s fundamental supply problems by reducing demand for a year.
The UK is not alone in the market mechanism policy debate. With the popularity of US president Barack Obama falling, and with the bruised Republicans in the ascendancy, US domestic politics may well derail US climate legislation that is required to mandate a federal emission trading scheme.
The January loss of the Massachusetts senate seat to the Republicans has put Obama’s health reforms – seemingly a bigger domestic political goal than climate change – in doubt, and with mid-term elections in November there is growing concern among climate action proponents that climate legislation will be deferred until 2011. And if the domestic political challenges were not enough, Obama’s climate legislation has also been dealt another body blow with three major corporations – BP America, ConocoPhillips and Caterpillar – dropping out of a coalition of businesses and environmental organisations that had been pressing Congress to pass climate legislation.
BP America and ConocoPhillips argue that the emission proposals before Congress do not sufficiently recognise the importance of natural gas to emission reduction with there being too much emphasis on clean coal technology. ConocoPhillips chairman and chief executive, Jim Mulva, said in a statement: ‘House climate legislation and Senate proposals to date have disadvantaged the transportation sector and its consumers, left domestic refineries unfairly penalised versus international competition, and ignored the critical role that natural gas can play in reducing GHG emissions. We believe greater attention and resources need to be dedicated to reversing these missed opportunities, and our actions today are part of that effort.’
Without oil industry support there is a growing consensus among political commentators that Obama’s climate change legislation has been fatally wounded, with some opponents even enthusiastically proclaiming that cap-and-trade legislation is already dead in the US Congress.
But although the participation of a US carbon market would be a major fillip for a global carbon market the failure of US climate legislation has become more of a sideshow with the real debate being centred on whether cap-and-trade is the right market mechanism to reduce emissions.
In January, US climate scientist James Hansen sought to render any US cap-and-trade scheme stillborn with a passionate argument in favour of an alternative fee-and-dividend scheme, and saying of cap-and-trade schemes, ‘you are choosing the path focused on corporate greed.’
Hansen advocates using the fee-and-dividend approach to reducing carbon emissions, rather than cap-and-trade, arguing that the fee-and-dividend approach is a ‘transparent, honest approach that benefits the public’, which he contrasts with a cap-and-trade scheme he lambasts as ‘a hidden tax … because cap-and-trade increases the cost of energy for the public, as utilities and other industries purchase the right to pollute with one hand, adding it to fuel prices, while with the other hand they take back most of the permit revenues from the government. Costs and profits of the trading infrastructure are also added to the public’s energy bill.’
Under a fee-and-dividend scheme, explain its proponents, a gradually rising carbon fee would be collected at the mine or port of entry for each fossil fuel (coal, oil and gas). The fee would be uniform, a certain number of dollars per ton of carbon dioxide in the fuel. The public would not directly pay any fee, but the price of goods would rise in proportion to how much carbon-emitting fuel is used in their production. All of the collected fees would then be distributed to the public. The scheme’s proponents argue that people would use their dividend wisely, adjusting their lifestyle, choice of vehicle and so on, and explaining that those who do better than average in choosing less-polluting goods would receive more in the dividend than they pay in added costs.
The market-based mechanism debates on both sides of the Atlantic are of course related, and centre on the cost of carbon as an economic indicator for low carbon investment. This debate on the role of the market will also resonate in other developed economies and it is a debate that needs to take place. For over a decade the market has been entrusted with delivering energy security, yet with the energy priority now shifting towards sustainability the market mechanisms put in place during the last decade have understandably been found wanting.
Clearly change is required, but this should be evolutionary and not revolutionary. Governments should resist the temptation to increase interventionism on the justification that changes to the market mechanisms are required, and instead look to improve the efficiency of the mechanisms already in place. After all it was the governments that introduced the market mechanisms, and no government, especially one facing an election, would want to tacitly admit to a failure of its market mechanism and governance. Or would it?
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