Why William Nordhaus was right and Nick Stern wrong
Given that coal fired power stations seem to be closing down left right and centre we might think this is a victory in the fight against climate change. Sadly though what we're actually seeing is the result of people following the advice of thwe wrong economist. It was William Nordhaus who was correct, Nick Stern who was wrong. Ambrose:
The British electricity group SSE (ex Scottish and Southern Energy) is already adapting to the new mood. It will close its Ferrybridge coal-powered plant next year, citing the emerging political consensus that coal "has a limited role in the future".
The IMF bases its analysis on the work Arthur Pigou, the early 20th Century economist who advocated taxes to stop investors keeping all the profit while dumping the costs on the rest of society.
So why has the power station closed early, citing soaring running costs, when coal prices are at an eight-year low and when it was modernised to stay open until 2023?
The Carbon Price Floor is arguably one of the most hidden and unknown but ultimately damaging pieces of modern industrial taxation. To use a shorter and more descriptive title, this carbon tax is slowly forcing the premature closure of the backbone of our electricity generating base.
As we regularly say around here, if there is an externality, one which cannot be dealt with by market or private means, then yes Pigou and his tax can be the right solution.
However, there's a difference possible in the way that it's applied. Roughly speaking the UK government has followed Stern's advice: here's the amount the tax should be, impose it now. Which is why these plants are closing at such great expense in stranded assets.
What should have been done is the Nordhaus approach. Sure, we need the tax but it would be better to work with the capital and technological cycle than against it. Thus, have a low tax now rising into the future. In this manner we'll still get the use of those capital assets that we've already built while also making sure that the next generation, to replace the current as they fall to bits, are non-emitting.
Don't forget, we're not imposing this tax to raise revenue: we're imposing the tax to reduce future emissions. And we obviously want to do this in the cheapest manner possible. Which is, as above, to use the current installed base until it falls apart and then rebuild it differently. Not, as the Stern prescription makes us do, close down perfectly good plant right now.
We should, obviously, be at least somewhat grateful that the government did listen to economists on this. It's just rather sad that they listened to the wrong one.