Last week the BIEE hosted an “academic critique” of the recent energy white paper. It was a well-attended event with insightful presentations from economists, engineers, and social scientists. I’d read the white paper when it came out but, as I do less policy work now, a forum like this is really useful to help understand what the big wigs think are the important issues. Perhaps not surprisingly, most were disappointed with the white paper in one way or another: it didn’t take into account recent policy changes (e.g. the EU energy and climate Action Plan), it gave insufficient attention to domestic security of supply issues and it generally failed to provide enough detail for academics (or anyone else) to independently verify the white paper’s chances of success.
One theme that was given particular emphasis by the economists in the room (David Newbery and Michael Grubb) was the question of whether a carbon tax or a quantity-based measure (e.g. cap-and-trade) would be the most effective policy instrument. From a scientific perspective, cap-and-trade at least theoretically delivers the greenhouse gas reductions that are needed to avoid dangerous climate change. Once you know you want to stabilise at 450 ppm, you simply keep dropping the total cap on the market and let prices adjust themselves accordingly.
However the practical problem is that this creates price volatility. The graph below for example demonstrates the rise and fall of carbon prices on the EU ETS (click the image for a bigger version or to see the original presentation by Prof. Newbery, please go here). This volatility makes it difficult for investors to estimate their future carbon liabilities and therefore they are hesitant to invest. So to get around this, it was suggested that a policy maker might wish to use a scientific basis to estimate the initial level of a carbon tax, adjusting as necessary, or a minimum carbon price for a trading scheme; this would hopefully provide the requisite certainty.
Anyway the reason I thought I would write about all this was that the Guardian today featured an article with this quote from the head of Eon (“Britain’s second largest energy-producer and supplier”):
“It’s very difficult for people like me trying to invest hundreds of millions of pounds. It is more an act of faith than anything else given you really do not know what the price of carbon is going to be in future.”
Great minds think alike?
