Wednesday, 23 January 2008

Barroso's Big Bill - Timing Couldn't Be Worse

So Bush and the Fed have fired the starting-pistol, the phoney war is over, and the 2008 financial crisis has officially kicked off.

And with immaculate timing, Presidente Barroso announces the EU’s masterplan to reduce carbon emissions, at a cost he estimates at € 3 per citizen per week, or 0.5% of GDP. Or perhaps more … “some commission officials acknowledge the bill might be double that

If this sounds a bit like the way the Olympics is costed, that’s because it is, and capitalists@work confidently predicts the bill would be way, way higher if the EU’s energy targets were to be met. Although space doesn’t permit detailed analysis here, it should be understood just how extraordinarily difficult it would be to meet those targets: we are talking full-scale rebuilding (and/or closure) of vast swathes of industrial and energy infrastructure. The nearest recent analogy would be the Deutsche Einheit (reunification) which cost Germany anywhere between € 50 – 150 billion per annum over more than a decade.

Taking the lower end of that range, and pro-rating for population, that leads one to estimate Barroso’s environmental bill at €12 per citizen per week, or 2% of GDP, with plenty of scope on the upside - at a time when GDP growth is in full retreat, a credit crunch is in full swing, and economic pessimism is mounting. Which is why we couched the above in the conditional: the bill would be way, way higher, if ...

But when push comes to shove – and the shoving has just started in earnest – we strongly suspect environmental concerns are trumped by economic worries. Presidente, you are just too late.



Anonymous said...

And what is the potential cost of doing nothing - not proven would be an equally unconvincing answer as well.

Stopping taking long term decisions when there is a crisis is never very sensible and is often the cause of future crises.

Anonymous said...

Isn't saying it is a "cost" of 0.5% GDP a bit of a misnomer? Won't a lot of this be on buying ETS permits, which govt can use to reduce taxes or increase spending. So isn't it more like a tax that changes behaviour?

Or have I got that wrong. I've not studied ETS closely.

Nick Drew said...

RWE - no I don't think so, I would guess it is mainly actual capex, (assuming it's not to be achieved by collapsing industrial output!) because even if physical CO2 reductions are subsequently 'reassigned to those who need them' via the ETS, they do need to be made in the first place.

The alternative to making actual reductions within the EU is to 'buy them in' from developing countries (another Kyoto mechanism which ties into the ETS). But to the extent that happens it really is an outright cost to EU states.

I go back to one of my original points, which I assume you'd agree with - achieving the actual reductions (whilst maintaining industrial output and general levels of comfort, travel etc) is a gigantic enterprise. The only mitigating factor might be where the plant etc that needs to be changed, was due for replacement anyway. It will of course be true to some extent, but even then what will be needed in most cases will be much more than just routine 'next generation' kit, so the cost will be higher.

Anonymous said...

I'm glad you picked up on this one Nick. I also thought that Barroso came across as some sort of google eyed fanatic with his head so far up his own backside that he has no idea what is happening in the outside world. But he has a history of being a google eyed fanatic. This from Wikipedia:-

"Barroso's political activity began in his college days, before the Carnation Revolution of 25 April 1974. He was one of the leaders of the underground Maoist MRPP (Reorganising Movement of the Proletariat Party, later PCTP/MRPP-Communist Party of the Portuguese Workers/Revolutionary Movement of the Portuguese Proletariat)."

- we'll all be carrying little red books next. Attached to our ID Cards no doubt.

But you missed one key point of the Barroso plan. "Rich" countries in the EU would be forced to cut CO2 by 20% but poor countries would be allowed to INCREASE CO2 by the same amount. Clearly this would either result in a massive increase in subsidy to Eastern europe by the back door (something already rejected by the EU during expansion) or it would result in a shift of manufacturing jobs from countries like Germany to countries like Poland. I can't see that going down too well with Germany when unemployment remains stubbornly high and is certain to worsen severely next year.

Anonymous said...

This story has to be worth a comment from you guys:-

Nick Leeson only managed to lose $1bn from Baring's and it took years - amateur! This French guy lost BNP Paribas $5bn in just one day! Allegedly....

"Honest gov, it isn't that we aren't reporting huge write-downs due to our own incompetence in buying dodgy credit derivatives. It was all due to some mysterious rogue trader who seems to have had his hands on an awfully large amount of our money".

Nick Drew said...

RSF - I like the idea of a "google eyed fanatic", a true 21st century affliction !

Shall take a look at the French rogue story, sounds like fun ...

Mark Wadsworth said...

Well, at least Barroso mentioned the word 'cost'. Your 2% of GDP is probably closer to the mark, but who cares?

The points to be made are:
1. There ain't no global warming.
2. Non-natural CO2 emissions are only about 3% of all emissions (animals breathing, vegetation rotting, volcanoes etc etc).
3. The most important greenhouse gas is water vapour, about which we can do sweet FA. The next worst are NO4 and CH4.
4. CO2 is an airborne fertilizer.
5. All this waffle about 'climate change' is just an excuse for authoritarian Big Government.

Nick Drew said...

Mark - I can go with you on 5, but on 1 you are rather swimming against a tsunami of evidence

Anonymous said...


I think you should revise [1]

1] There ain't no MAN-MADE global warming

Latest evidence strongly suggests that Mars and Jupiter are also experiencing warming to the same extent as Earth. Al Gore has claimed it is due to excessive use of 4x4's down the Martain canals. Those Martians - when will they ever learn?

Mark Wadsworth said...

There ain't no global warming, there ain't no mad-made global warming, it's all just variation around the mean, temperatures now are about the same as in the 1930s.

The possibility that we might be going into another ice age scares me much more.

Anonymous said...

Anyone have an idea what the EU carbon price from this proposal might pan out at? I'm wondering if this will make nucs economic.

One US power company CEO said recently "Based on our analysis, nuclear power will not be economic without a sustainable carbon price of roughly $30 per ton, or more." Probably about the same here.

But the Pound's slide against the Euro is probably making the EDF-BE plan for EPRs look sickly. US plant is dropping in Pounds price, but they don't seem to have a champion over here yet.

Nick Drew said...

RWE - $ 30 is one of those oft-used round numbers: it was widely held to be the marginal CO2 offset- cost before ETS Phase I kicked off, and hence the likely price of C02 in the scheme(that is, before the PhI price collapsed to a few cents)

Of course, the economics of nucs (as well as wind & wave etc) are more concerned with absolute power prices than with carbon spreads

I doubt if anyone has enough faith in the calculations of cost of the Barroso Bill, to place much reliance on an inferred ETS CO2 price (look at the vagueness and range of costs used in the leaked DTI/BERR papers)

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