Running out of steam?

Let us set aside the argument about whether global warming is a serious threat that we can address through Government policy. Let’s assume that it is. Given the threat, should we go about reducing carbon emissions in the most expensive way possible? Of course not. Instead, we should allow households and firms to find the most efficient ways to economise on carbon emissions.

The most efficient way to reduce carbon emissions would be to either tax them 
or to cap emissions and allow trading. Carbon cap and trade, for example, means that, if energy company ABC has found
a really efficient way to reduce carbon emissions, it can sell its carbon allowance to company XYZ which is struggling to
 get its technology to work. Taxing carbon emissions means that people would consider whether they want to respond by buying a more efficient fridge, switching the heating down or buying energy from the cheapest renewable source.

Instead, we have the Government second guessing the market and subsidising all
 sorts of different ways of reducing carbon emissions some of which – such as offshore wind – are horrifically expensive. Not surprisingly, policy has become entirely incoherent as we saw at the party conferences recently. David Cameron is lauding the number of people who are producing windmills whilst Owen Paterson seemed to be calling for an about-turn in policy. As far as the Prime Minister’s comments are concerned, if he thinks that it is beneficial for the Government to promote the development of an industry that produces electricity in an incredibly inefficient way, then it is no wonder that we have a productivity crisis.

At the same time, George Osborne now appears to want to provide tax subsidies
 for shale gas – which is most definitely not carbon neutral – and is berating the energy companies for raising prices. He should look at the beam in his own eye. Energy company profit margins are worryingly low, but energy costs have been raised enormously because of the government’s inefficient green agenda.

What would a Government with real courage – one that actually cared deeply about this issue – do? It would raise value added tax on domestic fuel consumption to the full rate of 20 per cent, whilst making a corresponding reduction in other taxes on the less-well-off.

We are implicitly subsidising domestic fuel consumption by not charging the same rate of VAT as we charge on other products. At the same time, we are providing subsidies to inefficient methods of generation – some of which, such as wind power, are not even effective in cold, still weather.

If the Government were to go beyond this policy, the least damaging option would be to exempt all renewable forms of energy from VAT and add an additional carbon tax to carbon-intensive production. The Government need do no more.
There is no need for the Government to guess whether wind power is better than wave power. The market will determine the most cost-effective way to reduce carbon emissions.

This article originally appeared in the latest issue of House Magazine.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.