Friday, 21 May 2010

‘No Subsidy’ vs ‘Floor Price for Carbon’

Among its 30 energy policy bullets, the Con-Lib prospectus includes: (a) encouragement for new nukes (with a let-out for conchie Libs), provided they receive no subsidy; and (b) setting a floor price for carbon.

Now the price of carbon goes more-or-less directly onto the wholesale price of electricity, because price-setting power plants will generally be either coal-fired or gas-fired, both of which need CO2 permits. Cui bono ? Any power generator not using CO2-emitting methods.

This means our old bugbears, nukes and wind farms.

And what a floor-price they want ! €50 sounds like a nice round number and that’s what they’re asking for – nearly four times the price of recent times. Exactly how that would work through to residential electricity prices is open to detailed debate, but in round numbers it would be 10% - 15% on average UK electricity bills.

But of course, €50 would only be the start. When, after a couple of years, the government notices that no new nukes have been started, and that the preposterous targets for new wind farms are not being met, they will solemnly be told by the subsidy-wallahs that the floor is not high enough.

Meanwhile, all these rogues have existing nukes and wind farms in operation, and will have been busily hoovering up the windfall of the higher electricity prices.

The best approach to carbon-pricing lies in another of the Coalition policies – persuade the EC to require that all CO2 allowances be auctioned.

Say after me: a floor price is a subsidy. Stick with the original instinct, chaps, and go with the virtuous slogan: No Subsidy !



Blue Eyes said...

Permits issued for fixed periods. Auctioned off at the start of each period. Number of permits issued reduces at a steady and predictable rate.


Money raised can mitigate other business taxes.

Tim Worstall said...

And 50 euros is in fact too high a floor price anyway.

whatever the subsidy/encouragement etc we give to non carbon should, clearly and obviously, be at whatever the costs to us of having carbon are. Stern puts this at $80 per tonne CO2 which for technical reasons comes out to about £30. A little below 50 euro. (technical reasons meaning boring stuff like discount rates and marginal as opposed to average costs)

And Stern is way at the top end of estimates as well.

What everyone is forgetting is that the price of carbon is not to be set at the rate where we stop using carbon. It should be set at the rate where carbon use which creates more damage than it saves should be stopped. So it should be set at the rate of the damage of carbon emissions, not at the rate which is required to make non carbon commercially attractive.

If carbon costs us 30 euro and non carbon would cost us 50 euor then we should continue to use carbon.

Mark Wadsworth said...

What Tim says.

Plus, I can see good arguments for taxing fossil fuel (to help wean us off the stuff, as glorious as it is), provided other taxes are reduced. If electricity companies paid no corporation tax, could pay out wages tax free and if users did not have to pay VAT on electricity, then maybe £30/ton would work out at a lower tax burden (in which case make the tax £40 or £50).

Nick Drew said...

we are all smarter than Huhne !

my thoughts are turning to how it might be possible to introduce unilaterally a UK floor-price for stuff that is traded internationally

would never underestimate the cunning of the subsidy-wallahs (motto: why do a hard day's work when you can lobby for a handout instead ?)

but the obvious method - an out-of-the-money put-option - or even a swap - suffers from several practical issues:

could it be traded ? who is writing the put ? how would credit risk be handled ? (esp if a swap) would it not be an explicit subsidy ? illicit, even ?