Environmental inefficiencies

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environmental-inefficiencies

The environmental movement has often discredited its cause by resorting to alarmism underpinned by poorly substantiated claims. It’s a pity. Not many people nowadays deny that human behaviour has an effect on the Earth's ecosystem. But, equally, no serious environmentalist who aspires to influence policy can advocate a return to the Stone Age. The environmental movement can be, and should be, a pro-market movement in which you, as a consumer, determine the policy.

Pollution and climate change in general affect consumers in two ways: firstly, if firms must change their production patterns to become more environmentally friendly then you, as a consumer of goods, will face higher prices. Secondly, if firms fail to change their production patterns, you as a consumer of clean air will receive a lower quality product. Clean air affects your quality of life now, and the consumption of limited non-renewable resources affects your quality of life later. If we put the histrionics and baby seals aside, there is no reason why a little old fashioned economic logic can’t make everyone, as global consumers, better off.

The problem right now is that there is no existing market mechanism to ‘price’ environmental degradation. Yes, different people value it differently, but that shouldn’t be a barrier to exchange. Other markets handle infinite different valuations to determine a price at the intersection of the supply and demand. Why, therefore, has as a market for this not emerged?

An externality is a benefit or cost to an external party that results from the action of unrelated party. Pollution is an externality. According to Coase’s theorem, if the rational parties with properly rights that incorporate externalities are able to engage in costless bargaining, an efficient allocation should emerge regardless these externalities. In short, markets should be able to account for externalities.

However, the problem with the market place for clean air is that property rights of the parties involved are ill defined. For example: My roommate believes that she has the right, as a co-paying member of our flat, to listen to Swedish House Mafia until 4AM. I know, however, that she does not. Our negotiation process will inevitably degenerate into whining, screaming, and maybe armed assault with a hairbrush, because our property rights at the beginning is not clearly defined. If we both agreed that house music was an inalienable right irrespective of time and place, then I might be willing to bribe her by doing her dishwashing or with chocolate. In short, we could establish a mutually agreed upon ‘price’ by which to trade a unit of house music.

The tragedy of the global commons therefore stems from tragically poorly defined property rights. Our current allocation of consumer goods –in short, our current lifestyle, is inefficient because market prices do not reflect the true costs and benefits of the production and consumption of goods. Do factories have a right to pollute? Do children have a right to clean air? What balance should be struck between the two? These seem like nebulous questions, but a clear answer to each is necessary for the success of any market-based strategy to climate change.

The end of cheap energy?

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ScottishPower, which was controversially acquired in 2007 by Spain's Iberdrola, the world’s leading renewables generator, has announced some very sharp price increases. From August, ScottishPower’s retail customers will pay 19% more for their gas and 10% more for their electricity. On average, this represents a near £200 annual increase. The other five integrated energy suppliers – EdF, E.On, RWE, Scottish and Southern Energy and Centrica – are also expected to announce major price rises.

Given that Centrica’s domestic gas share is well over 40%, its gas pricing policy will be particularly carefully scrutinised. The media has expressed surprise and anger at these price increases. However, they are hardly unexpected. Most importantly, wholesale gas prices, which are a vital component of the UK’s energy mix, have risen in recent months. This trend heavily impacts electricity generation costs: gas-fired plant is now increasingly dominant.

Looking forward, it is difficult to see much relief. With new nuclear-build a decade away at best – the Fukushima accident makes this even less likely – the UK is becoming ever more dependent on gas generation. Any new coal-fired plant is seriously compromised by environmental issues, and the considerable expense of addressing them. And renewable generation is hardly cheap, especially if the cost of back-up plant is included. Furthermore, Germany’s planned exit from nuclear generation by 2022 is widely expected to push up long-term gas prices.

Ofgem has calculated that the UK’s energy investment bill over the next decade – assuming no major U-turns on environmental commitments – will be around £200 billion. Much of that investment is due to be undertaken by the six heavily-indebted integrated energy companies.

Hence, the prospects for lower energy prices are slim. Driven also by rising food input prices, as confirmed recently by several leading supermarkets, inflation remains well above target. Serious energy uncertainties and rising inflation are a potent combination for any government. Anybody remember the 1970s?

Saving fisheries with property rights

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The video above is an interesting discussion of an experiment being conducted in the US of creating property rights over ocean fisheries. Fishing is a classic case of the tragedy of the commons. Since nobody owns fish in the sea, there's no incentive for anybody to allow the fish stocks to replenish themselves. It's a free-for-all where the only incentive is to fish the sea into oblivion.

The most effective solution to this is to create property rights over fisheries, so that the owners of those fisheries have incentives not to let them die out. The challenge is in the implementation – I don't know if the method being tried in the US will work, but it's good to see some people trying.

Economic growth is the way to beat pollution

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As China flashes its new wealth buying up the world, there is no shortage of people spraying on cheap perfume and offering themselves for sale. One of the worst aspects of my visit to a Shanghai conference last week was the presence of large numbers of Western enviro-academics. After Climategate I don't know how they dare go out in public; but then they are just frantic to set up joint projects with the locals.

Not surprising. As the US hoodlum Willie Sutton (almost) said when asked why he robbed banks: "That's where the money is." China's government and universities are awash with the stuff, and they've worked out that they have to say something nice about climate change if they are to continue building three coal-fired power stations a week and expect the West just to stare at its shoes.

True, the pall of smog that hangs over all China's big cities is awful. I too remember the smell and grime of everyone's coal fires when you walked down any UK street, and when 'pea-soupers' were a regular part of life in London. Folk from 'The Smoke' must have suffered the same for most of the last 200 years: it was the price of our economic growth, no different to the price that China is paying today. But when you do grow and become rich, you can afford to deal with your pollution. Compared to the necessity of feeding your family, clean air seems a bit of a luxury. And at least now we know how to clean up our city air: the Chinese will not need to re-invent the same technology, so their clean-up will come much faster.

City pollution certainly isn't pleasant for the local population, though the debate continues regarding its possible global effects. But the Chinese aren't throwing money at Western academics to learn how to clean themselves up (though they may yet clean things up by simple administrative fiat). They are doing it to buy friends and influence people. Well, to buy friends, at least.
 

Merkel does a Bismarck

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Having just finished reading Jonathan Steinberg’s excellent 480-page biography of Otto von Bismarck, his legacy of governing - without principle save the retention of power - has apparently been adopted by Germany’s Chancellor, Angela Merkel, who confirmed that all 17 of the nation’s nuclear power stations would close by 2022. With the CDU’s political position weakening, realpolitik has prevailed. The nuclear U-turn was driven by the post-Fukushima surge in support for the Green Party – a likely Coalition partner for the CDU after the next General Election.

However, this controversial decision has wide-ranging repercussions for the EU, whose common energy policy – Germany now being anti-nuclear and France being ardently pro-nuclear – is seriously frayed. Germany will become increasingly reliant on gas-generated power and an expansion of renewables. Both E.On and RWE, Germany’s leading utilities, are furious and may pursue the issue through the courts, unless very large compensation is paid.

For France, this decision provides real long-term opportunities to export nuclear-generated power to other major European countries, including Germany, Italy and Switzerland, all of whom have become anti-nuclear. Expect EdF to build several new plants in Eastern France, as the equivalent of a nuclear Maginot Line. In the UK, Germany’s nuclear U-turn will undoubtedly re-invigorate environmentalist parties.

More specifically, the future of the E.On/RWE Horizon consortium now looks distinctly shaky. Since neither utility can operate nuclear plants in its home market post 2022, it would seem anomalous if either invested £billions to do it elsewhere. This scenario leaves the UK highly exposed and very dependent upon EdF for new nuclear-build. Furthermore, EU gas prices will probably rise sharply due to higher German demand for gas.

Having advanced nuclear physics studies in the inter-war period – fortunately, despite Werner Heisenberg’s efforts, the Manhattan Project surged way ahead in the race for the atomic bomb – Germany’s retreat from nuclear some 90 years later will be a seminal moment.

Germany says no to nuclear

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Germany is a land of environmentalists. The first successful green party in Europe, Die Grünen, won their first seats in the Bundestag in 1983 (compared to Britain's first Green MP in 2010). And much German environmentalism revolves around the rejection of nuclear power. This, when taking into account Germany's history, is not altogether surprising: Germany bowed out of World War II only four months before the first nuclear weapon was dropped on Hiroshima. Afterwards, in the Cold War era, a divided Germany found herself as the potential battleground of a full-scale nuclear war between NATO and the USSR. The seeds of nuclear-rejectionism were planted. After Chernobyl, the German neurosis took another knock.

Then, a few months ago, the fifth most powerful earthquake ever recorded struck Japan, promptly followed by one of the largest tsunamis in history. In the path of these natural disasters was an antiquated, poorly-designed nuclear plant called Fukushima. Was the building reduced to rubble by the earthquake? Nope. Did the subsequent tsunami turn it into radioactive driftwood? Not that either. Were hundreds killed? No. Only one person has been recorded as dying because of the disaster – of a heart attack.

I'm no expert on nuclear power, but it strikes me that Fukushima stood up remarkably well to the worst that mother nature could throw at it. Granted, the designs were not perfect, but improvements in last 40 years must have more than solved these issues.

However, hysteria is often far more attractive than common sense. Although not under any immediate risk of neither a magnitude 9.0 earthquake nor a tsunami, Germany immediately took its nuclear power-plants offline and ordered a review. Only after a few months of stating that Germany wouldn't abandon nuclear power 'on her watch', Merkel allowed exactly this to happen and committed Germany to decades of increased energy costs and the importation of (nuclear) power.

In deciding to shut down all of its nuclear power-plants by 2022, the Chancellor has finally caved in to environmentalist scaremongering. No concrete plans have been laid out about to replace the 23% of formerly-nuclear energy, although it is almost certain that the emphasis will largely be on renewables. Business leaders have criticised this, stating energy costs could rise by 30%. At a time, of growing inflationary pressures, the German electorate may live to regret such decisions, especially considering that nuclear has a lower carbon footprint than wind and hydroelectric power. (PDF)

The German abandonment of nuclear energy is a sad example of a minority of sanctimonious Luddites reversing human progress. Cheap, nuclear energy, especially for one of the world's greatest industrial powers, is the way forward. Instead, the irrational fears of an objectionable few will result in reduced prosperity for the majority.

Ich bin enttäuscht.

Hurrah for solar power!

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hurrah-for-solar-power

And Ya Boo Sucks to the lies told about it.

Here's the good news:

 Solar photovoltaic (PV) power is set to achieve the environmentalists' holy grail of grid parity – the same cost price as fossil fuels – across the European Union by 2017, according to a UN expert.

How excellent! Low carbon energy becoming cheaper than high carbon such. Isn't that just what everyone is delighted to have? If you accept the IPCC's views on climate change then this is truly excellent and even if you don't then it's still nice to have, isn't it?

But now for the lies that are told about it:

 But Sven Teske, a contributing author to the Intergovernmental Panel on Climate Change (IPCC)'s recent report on renewable energies, also warned that progress could be endangered by market uncertainty over the future of feed-in tariffs. These tariffs are subsidies allowing fledgling renewable industries to compete with fossil fuels that receive up to 10 times more state aid.

There are two in just that one short paragraph. The first is over those subsidies to fossil fuels. The article's own link is to here, which gives the IEA as the source. The IEA's report can be seen (partially) here. Solar power is not competing with subsidised fossil fuels at all. The subsidies for fossil fuels are all in places like Iran, Russia, Saudi Arabia. No, not for their export, but for their local consumption. The subsidies to solar and renewables are all in places like the UK, Spain, Germany and so on, where far from subsidising fossil fuels we tax them heavily.

This is, I'm afraid, the lie indirect. That there are subsidies to fossil fuel consumption, that they are larger than the subsidies to renewables, is correct. But they're not competing with each other as they're not being done in the same markets or places. They're just not competing. However, it's very useful to be able to say that "they're getting money so we should too" and this only works if you elide over the people and places where the subsidies are taking place.

Then we come to the second lie, the more direct one. For we have this rapid approach of grid parity as being the argument in favour of continued subsidy: when of course it is exactly the opposite. For if in 2013 (for some parts of Europe), or 2015 (South of England) or 2017 for all of Europe, it's all going to be cost competitive without subsidy, what on earth are we doing signing people up to 25 year plans of subsidies at four times the going rate for electricity?

Further, if Spain and Germany and China are splurging such sums on subsidies, what should be our reaction here? To add to such? No, of course not. It's to wait three or four years then install the systems that actually make economic sense.

That solar PV will be imminently cost effective is not an argument in favour of 25 year subsidies, it's an argument against them. Wait, do nothing, then everyone will naturally install this new cost effective technology the moment it beomes cost effective.

Time to ban feed in tariffs above the market rate altogether I think.

When the levee breaks

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Private citizens in Mississippi doing what their government couldn't – protecting their homes from the overflowing Mississippi River with individually-made levees. More photos here.

How to get cheap energy and clean air

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Last week the Legatum Institute assembled a panel of experts to speak on energy security. On the one hand, politicians concern themselves with providing affordable energy. On the other hand, prices apparently need to be kept artificially high for environmental reasons, and the energy industry supposedly needs to be subsidised and insulated from foreign competition so that Britain does not become overly reliant on buying energy from countries with bad intentions or human rights records.

Politicians believe they can find the right balance, but the nature of government would suggest otherwise. After all, artificially keeping energy prices high is a dispersed cost, and one which governments can more easily remedy with things like the Winter Fuel Allowance: the political pay-off is much higher for a policy with obvious, concentrated benefits. Meanwhile, all consumers suffer higher prices, along with the added taxes levied to mitigate them.

Similarly, subsidising existing national industries leads to state capture by special interests. Bjorn Lomborg in his film "Cool It" cites how the nuclear industry put a stop to the use of cost-efficient wave power. Even supposed environmentalists may oppose the introduction of new fuel alternatives: the renewables they have invested in are heavily reliant on subsidy, so the arrival of an energy source that is actually cost-efficient and clean is a threat. Government involvement therefore means the consumers again suffer from higher prices, and the environment is damned along with them too!

As for security concerns, it's baffling to think why any country would want to lose customers for its exports, no matter how dodgy. So long as trade is unrestricted, the UK will always choose to buy whatever is cheapest, irrespective of source. Instead, vested interests now appear to use environmentalism as their trump card. Strict environmental standards act as barriers to trade, benefiting domestic industries, raising energy prices and adding political tensions with trading partners.

But do worries about climate change demand that we keep the price of energy high in order to reduce consumption? Consumers would suffer, and innovation to solve climate change is best promoted by leaving us all the richer to concern ourselves with it, and without vested interests using the state to block and crowd out effective alternatives. A free market in energy allows it to be affordable and available. It is also our most powerful tool to find a solution to climate change.

Dumb regulations and dumb cars

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dumb-regulations-and-dumb-cars

A Smart Car? One of those little electric G-whizzy things?

No. This, believe it or not, is an Aston Martin. You will of course know Aston Martin (or Aston Martin Lagonda Limited, to give its full name), and the brand of luxury Britsh sports cars. You will know them from the DB5 driven by James Bond in the film Goldfinger, and from the open-topped Seychelles Blue DB6 Mark II that Prince William and his new bride drove between Buckingham Palace and Clarence House last month.

So what are Aston Martin doing producing this little thing? Stretching the brand is one thing, but this is surely the antithesis of the entire Aston Martin concept.

Well, the answer is quite simple. Those nice people at the European Union have decreed that, from 2012, all European car companies have to have an 'average' CO2 emission of 130g/km across most of the cars in their range (and across all by 2015) – or face huge fines. That's pretty bad news if your business is based on producing throbbing V8s. When the company was owned by Ford, I guess a few Ka models could be thrown in to get the average down. But after the 2007 buy-out that saw Aston Martin taken independent again, this option no longer exists.

So, to bring the average down, Aston Martin has produced the £30,000 Cygnet, which emits just 113g/km CO2.

It might well be a lot of fun, I don't know. But I do know that heavy-handed EU rules that force manufacturers to do such daft things should be towed off to the scrap yard.